153.548 = 107 pages Abstract The purpose of this thesis is to analyze business model innovation in the social media industry. This industry of extraordinary growth and continuous technological development is driven by high level of investment from venture capitalists in their quest to find the next Facebook or the next Instagram. By conducting case studies on seven successful venture capital founded social media companies we want to map key similarities and differences in their business models. By creating a theoretical framework; the 7 Factor Model and combining it to the Business Model Canvas we identify scalability, uniqueness, loyalty, profitability, sustainability, mobility and inimitability as key value drivers. Based on our findings from the case studies we conclude that the design of business model influences the success of a social media start-up company and state that business model innovation is an important issue for these companies to react and gain competitive advantage in a world of constantly changing condition. Table of Contents 1. Introduction .......................................................................................................................................................... 7 1.1. Foreword ....................................................................................................................................................... 7 1.2. Problem formulation .................................................................................................................................. 7 1.3. Thesis approach .......................................................................................................................................... 8 1.4. Research strategy ........................................................................................................................................ 9 1.5. Case study design ..................................................................................................................................... 10 1.6. Validity and Generalization .................................................................................................................... 12 1.7. Delimitation................................................................................................................................................ 12 1.8. Thesis structure ........................................................................................................................................ 13 2. Theoretical framework ..................................................................................................................................... 14 2.1. Empirical evidence .................................................................................................................................... 14 2.2. Business Model Canvas ............................................................................................................................ 15 2.3. The 7 Factor Model ................................................................................................................................... 18 2.3.1. Scalability ........................................................................................................................................... 19 2.3.2. Uniqueness ......................................................................................................................................... 19 2.3.3. Loyalty ................................................................................................................................................. 20 2.3.4. Profitability ........................................................................................................................................ 20 2.3.5. Sustainability ..................................................................................................................................... 20 2.3.6. Mobility ............................................................................................................................................... 20 2.3.7. Inimitability ........................................................................................................................................ 20 2.3.8. The 7 Factor Model Score ................................................................................................................ 21 2.4. Combined evaluation framework .......................................................................................................... 21 3. Venture Capital .................................................................................................................................................. 22 3.1. What is venture capital? .......................................................................................................................... 22 3.2. Industry dynamics .................................................................................................................................... 22 3.3. Investment strategy .................................................................................................................................. 23 3.3.1. Industry choice .................................................................................................................................. 23 3.3.2. Stage of investment .......................................................................................................................... 23 3.4. Exit opportunities ..................................................................................................................................... 26 3.5. Investment process................................................................................................................................... 27 1 3.5.1. Screening ............................................................................................................................................ 27 3.5.2. Evaluation ........................................................................................................................................... 28 3.5.3. Investment.......................................................................................................................................... 28 3.6. The logic of the deal ................................................................................................................................. 29 3.6.1. Control mechanisms ........................................................................................................................ 29 3.6.2. Incentive mechanisms ..................................................................................................................... 30 3.6.3. Monitoring mechanisms .................................................................................................................. 30 3.6.4. Liquidity mechanisms ...................................................................................................................... 31 4. Social Media ........................................................................................................................................................ 32 4.1. What is social media? ............................................................................................................................... 32 4.2. The purpose of social media .................................................................................................................. 32 4.3. The need for social media ....................................................................................................................... 33 4.4. Smartphones, tablets and mobile applications .................................................................................. 33 4.5. Market segments in social media .......................................................................................................... 35 5. Venture Capital Investments in Social Media .............................................................................................. 37 5.1. Why invest in social media? .................................................................................................................... 37 5.2. Investment activity ................................................................................................................................... 38 5.3. Investment criteria.................................................................................................................................... 39 5.4. Business model as a key differentiator ................................................................................................ 40 5.5. Business model innovation in social media ........................................................................................ 41 5.5.1. Advertising model ............................................................................................................................ 42 5.5.2. Affiliate model .................................................................................................................................. 42 5.5.3. Crowdsourcing model ..................................................................................................................... 43 5.5.4. Freemium model ............................................................................................................................... 43 5.5.5. Merchant model ...............................................................................................................................