The Problem with Ello

Building something like Ello costs money. They have a team of at least seven people, and have worked on it for months. That doesn’t come cheap.

The About section makes it seem like Ello was built independently, a group of artists making something for themselves, presumably funded by volunteer effort and maybe a seed investment from Ello president and CEO Paul Budnitz, who also founded Kidrobot and Budnitz Bicycles.

But a little digging shows a much more predictable source: they took a $435,000 round of seed funding in January from FreshTracks Capital, a Vermont-based VC firm that announced the deal in March.

Why is this a problem?

The Ello founders are positioning it as an alternative to other social networks — they won’t sell your data or show you ads. “You are not the product.”

If they were independently-funded and run as some sort of co-op, bootstrapped until profitable, maybe that’s plausible. Hard, but possible.

But VCs don’t give money out of goodwill, and taking VC funding — even seed funding — creates outside pressures that shape the inevitable direction of a company.

Before they opened their doors, Ello became hooked on an unsustainable funding model — taking cash from VCs — and will almost certainly take a much larger Series A round once that $435,000 dries up. (Which, at their current burn rate, should be in a couple months.)

And they’ll have no trouble getting it. There’s a lot of money out there right now, and it will be extremely tempting to take it, especially if refusing it would mean closure or layoffs.

The problem, of course, is that VCs aren’t like Kickstarter backers, or even like angel investors. Kickstarter or Patreon backers just want the thing being made. Angel investors may have other reasons to invest beyond equity: fame, insider access, or maybe just the joy of helping something exist.

VCs may invest in things they think are interesting or want to exist, but they primarily invest money in startups to get a return on their investment, on behalf of their limited partners. That return usually takes the form of an exit: an acquisition or an IPO.

Unless they have a very unique relationship with their investors, Ello will inevitably be pushed towards profitability and an exit, even if it compromises their current values. Sometimes, this push comes subtly in the form of advice and questions in emails, phone calls, and chats over coffee. Sometimes, as more direct pressure from the board. (FreshTracks’ Managing Director sits on their board.) Or, if things go bad, by replacing the founders.

The Ello team knows that how a startup is funded shapes how it behaves. They spend a good chunk of their About pages talking about how they’re not going to make money (not ads or selling your data), and a little bit about how they hope to (paid premium features). I hope they’re right — it’d be great to have more startups that aren’t reliant on ads.

But they completely fail to disclose how Ello is being funded now, which matters just as much, if not more, as any future revenue plans.

I love seeing people build new stuff. More people trying to build crazy experimental communities on the Internet is a very good thing. And nothing’s more audacious than trying to build a new social network.

Social networks become the glue that connect people together — the foundation for friendships, relationships, and new works of creative expression.

Building a social network is like opening the doors to a huge party and inviting everyone in. Without a way to get your stuff out, shutting down a social network is like locking the door and burning the place down.

At the moment, Ello is a free, closed-source social network, with no export tools or an API, fueled by venture capital and a loose plan for paid premium features. I think it’s fair to be skeptical.

Like everyone else here, I hope Ello can stick to their principles, resist outside pressure, fight market forces, and find a unique and sustainable niche.

Let’s hope their investors feel the same way.

(Note: I originally posted this article on Ello shortly after its launch, along with a followup responding to the media interest.)