Nextdoor Sports a Valuation Over $1B — But How Will It Make Money?

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This is the year of the unicorn. There are around 80 startups currently valued at $1 billion or more, according to estimates — and it’s to the point where you’re nobody until you’ve hit 10 figures.

By that measure then, Nextdoor is somebody. After announcing a $110 million round of funding earlier this month, the locally focused social network zoomed to a $1.1 billion valuation, even though it has yet to announce a monetization strategy.

Launched in 2010, Nextdoor is sort of a Facebook for your neighborhood. That is, you can set up your own social network among people who live within a radius of up to 3,000 households, though the sweet spot seems to be 750. Once your network is established, users can share information with neighbors warning of a suspicious pedestrian or fielding offers for an unwanted couch.

The outstanding question for the company is how it will make money. Nextdoor does not sell ads right now and may never do so. At some point, that may change. Counting on handymen and local contractors to hawk their services on Nextdoor is probably unrealistic. However, since many people on the network are homeowners, it would make sense for The Home Depot or an insurer like Geico to execute a national buy.

While advertising remains on the back burner, CEO Nirav Tolia recently floated the idea of using Nextdoor as a vehicle to book a local contractor or tutor perhaps. From a user’s point of view, this is an attractive idea. Instead of taking Yelp’s word for it, you can ask people you know and trust for recommendations for local contractors and restaurant recommendations.

For Nextdoor, a transactional model might explain some of the investors’ faith, and may provide a clear path to revenue growth than trying to untangle the knot that is local advertising. In this scenario, users would go on the network and there might be a prompt to “find a plumber” or something along those lines. Then Nextdoor would take a cut. And, If the 53,000 “microcommunities” already on Nextdoor are already teeming with vibrant discussion, this might be a great monetization option.

But these transactional networks, which have become popular in the wake of Uber’s success, require a degree of ubiquity that may pose a problem for the company. In the interest of maintaining integrity, Nextdoor purposely makes it difficult to set up your own community by requiring you to get nine other people in your neighborhood to sign up. When I tried to launch a Nextdoor network in my town, I stalled at around five people. I was hoping friends of friends would sign up, but that didn’t happen. Part of the reason is that in many cases it’s not better than the alternative for an already network-saturated consumer. Why would anyone want to join yet another social network, especially if their neighbors (the ones they talk to at least) are already on Facebook? Also, chances are if you’ve lived in your community for any length of time, you already know at least one neighbor whom you can ask for recommendations about contractors, etc., and that person can ask other neighbors.

I believe that in order to succeed financially Nextdoor will need to make the on-boarding process a bit easier while creating more real incentives for engagement. If the company wants to tackle that remaining 75% of the market and move beyond its Silicon Valley stronghold, why not give community organizers a nominal fee (a $25 gift card at Starbucks – or maybe a local business — would be enough incentive for many) or let you set up a network with, say, four people instead of nine?

todd-wasserman-headshot-smlTodd Wasserman is a freelance writer based in New York. Previously, he was the business editor for Mashable and the editor-in-chief of Brandweek.

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