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March 3, 2015 – The New York Times, By Mike Isaac

Internet companies have been trying desperately for years to court people like Isaac Gonzalez to use their services.

He is 34 years old, married, a father and a well-regarded leader of his neighborhood association in Sacramento. Local government officials and business owners know who he is. When Mr. Gonzalez weighs in on local issues, his neighbors listen.

Image of a man leaning against a street sign
Nirav Tolia, Nextdoor’s chief, in the Lorelei area of Menlo Park, Calif., the start-up’s first test community. Credit Jason Henry for The New York Times

And Mr. Gonzalez’s opinions and recommendations are exactly what Nextdoor, a San Francisco-based social networking start-up, believes will be the key to expanding its network’s reach and opening a trove of revenue from local businesses and service providers.

“Building community is really, really hard,” Nirav Tolia, chief executive of Nextdoor, said in an interview. “Trust is essential, and it has to be authentic.”

Investors think Nextdoor is on to something. The company will announce on Wednesday that it has raised $110 million in venture capital from investors like Redpoint Ventures and Insight Venture Partners. The new investment values the three-and-a-half-year-old start-up at about $1.1 billion, putting the company among the sharply rising number of tech start-ups with 10-figure valuations.

Customer using an app on a smart phone
Nextdoor has slowly built a network of more than 53,000 microcommunities across the United States, all based on local neighborhood boundaries. Nextdoor restricts communication to only those people who live close to one another. Credit Jason Henry for The New York Times

The investors seem to believe that there is more money to be had in small — neighborhood-size — communities. Many Internet companies, including AOL, Google and Foursquare, have already homed in on this market, with mixed success. Mr. Tolia and Sarah Leary, the founders of Nextdoor, believe they have found the answer.

In short, it is all about community. Nextdoor has slowly built a network of more than 53,000 microcommunities across the United States, all based on local neighborhood boundaries. Nextdoor restricts communication to only those people who live close to one another; users are required to verify their identity and home address upon signing up.

Consider Nextdoor a modern, more attractive version of a community email list service or Yahoo Groups, the popular message board. Users can post neighborhood news, offer items for sale, ask for help finding lost pets or organize a block party.

Nextdoor also works with about 650 local government agencies that can send out citywide alerts on things like utility shutdowns in specific areas, crime alerts or emergency-preparedness tips.

That network, in Nextdoor’s telling, creates trust between users, who will put more stock in one another’s comments and — more important for the company’s bottom line — in recommendations for local services and businesses.

Of the five million messages exchanged each day on Nextdoor, Mr. Tolia said, the network’s users send more than one million recommending services to one another. Around 80 percent of those posts are discussions about local service providers and businesses.

The goal, the company says, is to begin to extract data from those conversations to produce recommendations. People on the service could then search for things like the best local tutors, a handyman or housecleaning services.

That is where Nextdoor sees a business opportunity.

The company is still in the early days of testing how it could make money from the recommendations. It may use those recommendations to help sell ads to the companies being recommended.

But it is also experimenting with on-demand services, similar to other start-ups like Uber, the car-sharing service, or Instacart, which lets users order grocery delivery online. Nextdoor could, for example, offer users the ability to book a highly recommended plumber or tutor directly from its network, and then take a cut of the fee for the service.

The company says that this approach could even unlock an entirely new market of people who offer local services — like dog walkers or babysitters — but have never before advertised online.

That is different from other networks, including Facebook, which primarily makes money by showing users ads tailored to their personal profiles, or Twitter, which offers interest-based advertisements. Both networks place ads inside a person’s content stream, between the myriad photos and status updates that flow through the feed.

“When people use Nextdoor, they’re not looking to post a cat pic, they’re looking for services, looking to sell things,” said Bill Gurley, a partner in the venture capital firm Benchmark, which is invested in Nextdoor. “From an advertising standpoint, context matters.”

The path to local advertising is well worn. AOL’s grand experiment to break into local communities was Patch, a network of hundreds of hyper-local news sites that focused on issues specific to a small geographic area. The effort was seen as a grand failure; AOL sold Patch in 2014 after hemorrhaging more than $200 million trying to get it off the ground.

Foursquare, the social recommendations start-up, also sells ads to local businesses who want to attract new, digitally knowledgeable customers. Last month, a Foursquare executive said the company has seen triple-digit year-over-year revenue growth, though he declined to state any exact numbers. Facebook has only recently started selling locally focused ads to small businesses.

And then there are companies like Yelp and Google, both of which offer scores of recommendations based on user searches and ratings.

Nextdoor’s philosophy is that a recommendation from someone in your community carries more weight than, say, a Yelp review from someone you may not know on the Internet, or an algorithmically determined Google advertisement.

And the on-demand approach is markedly different from older methods of culling dollars from local businesses, usually through traditional advertising avenues.

“The power of social networks is that they’re a bottoms-up phenomenon,” said David Sze, a venture capitalist at Greylock Partners and a Nextdoor board member. “You provide this social utility, and users start talking about commerce and local services on their own.”

Search advertising, like Google’s, will continue to dominate online ad spending over the next five years, according to a report from Forrester Research, which expects digital advertising to top $103 billion over the next five years. But Shar VanBoskirk, a Forrester analyst, anticipates social ad spending to grow the fastest of all digital ad categories.

It is early days for Nextdoor’s business plans. The company has spent nearly all of the last three years expanding its user base, the exact numbers of which it does not disclose.

But this year, Nextdoor plans to let businesses post to its network, a first for a company that has to date allowed only its users and local governmental organizations to communicate with one another.

What is clear, however, is that Nextdoor is not in a big hurry to slap on a business model and risk upsetting its users, much like the reaction Facebook experienced when it first began to introduce advertising to the network.

“How do you crack local, when so many companies before you have failed? You play the long game, and take it one step at a time,” Mr. Tolia, the Nextdoor chief executive, said. “It takes patience, trust and a whole lot of runway.”

 

The information above is for general awareness only and does not necessarily reflect the views of the Office of Economic Adjustment or the Department of Defense as a whole.

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