A Web 2.0 entrepreneur counts his blessings

Editor's note: This is part of a series of stories about the recession's effect on the tech industry.

Suleman Ali cashed out just in time.

The 26-year-old, a former Microsoft employee who helped put together the Windows Home Server product, founded a company called Esgut within months of the debut of Facebook's developer platform in May 2007. Esgut is a portfolio of Facebook applications, and a few of them, like Superlatives and Entourage, became genuine viral hits. In April, Ali sold the 12-employee Esgut to the Social Gaming Network, a Silicon Valley company backed by the likes of Bezos Expeditions, the Founders Fund, and Greylock Partners. He said the price was in the seven figures.

But Ali is the first to acknowledge that for upstart social-platform developers, hailed just months ago as the Valley's hottest breed of bright young things, the condition has taken a significant turn for the worse.

"Most people are not counting on anything," the lanky and bespectacled Ali said over lunch at an organic restaurant near New York's Union Square in early December. "They're just operating from day to day."

When Facebook's developer platform launched, the social network's traffic began to really skyrocket. What had started as a no-frills networking site for students at elite universities became a Silicon Valley buzz factory with legitimate geek credentials. And however gimmicky many of the most popular Facebook Platform apps were, millions of people decided they now had a reason to join the site. The floodgates had opened. Facebook was a phenomenon.

When other social networks such as MySpace, Friendster, and Hi5 also paraded out developer platforms, the tech world took it as evidence that there was a big future in building platform applications. More importantly for developers and ambitious tech entrepreneurs, it looked like there could be gobs of money in it; the open, anyone-can-play attitude created the notion that there was enough for everyone.

"The social platform (on Facebook) actually launched the last day that I was at Microsoft...I was quitting without any idea of what I was going to do," Ali recalled. His aims for leaving Redmond were starry-eyed. "I left because I wanted to do a start-up. I wanted to see what I could do out there on my own. And I wanted to care deeply about what I was working on."

But he had no concrete plans to go the Facebook route initially, he said. "I ended up in my parents' house in Florida and was kind of bored, and started building Facebook apps just out of restlessness and the desire to do something."

Then, Ali continued, he went to the Graphing Social Patterns West conference in San Diego in March and met Social Gaming Network founder Shervin Pishevar. At the time, he was looking to raise venture funding but hadn't thought about selling his apps. "We talked for 30 minutes and he was like, 'You sound like the exact type of people we want at SGN.'"

Ali sold Esgut to Pishevar's company the next month.

Widgets buzz turns into hush
Ali got lucky. Even before the reality of the recession set in, the social-platform craze was subsiding. The venture capital buzz about widgets began to quiet over the summer. Some of the sillier novelty apps wore off in popularity. Companies that were snapping up small apps and raising huge amounts of venture capital, like Slide and RockYou, grew intimidatingly bigger--but the glut of independent apps made it more difficult to grab the attention of potential buyers. And after new restrictions, a redesign, and then the social network's focus on expanding through its Facebook Connect log-in service, it became evident that a social-network platform is still a new phenomenon that can change dramatically, and not always to the benefit of little start-ups.

"There's definitely a lot of tightening up," Ali said. "There's a few people I know who have apps that are relatively small, and they're selling them for valuations lower than what they could've sold them for a month ago, and there are just no buyers in the marketplace. I think they're going to have a hard time selling, period--forget trying to sell at a lower valuation. They're just having a hard time getting rid of them."

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So would he still be able to sell his company as easily now? "No, probably not," Ali admitted. "If we were the same company we were then, it would be much harder to sell today. I think we would've had to evolve as a company. I think we would need to be generating more revenue than we were."

But for all his concern about the fate of social-platform developers in a recession, Ali is still strikingly bullish on Facebook--enough so that his newest project is a fund for Facebook stock. He started purchasing it in November, he said, and is meeting with investors in the hopes of purchasing more. He added with surprising gusto that Facebook's decision to delay direct cash-outs hasn't derailed his plan.

"I think that's actually good news for us," Ali said. "I think that means that the price we pay will actually go down because there are all these employees who intended to sell stock back to Facebook, and now they're not going to be able to sell it to Facebook, (so) they'll have to sell it somewhere else."

He hopes to keep the stock until Facebook files for an initial public offering, and he still thinks that's on track, too. "I think it's going to be a function of the economy and when the markets open back up for an IPO," he said, and cited target dates that had been provided in interviews by Facebook investor and board member Jim Breyer. "From a Facebook perspective, I think it'll be ready to IPO in 2011."

Many critics would say that's wishful thinking and that the company will sell--to existing investor Microsoft, maybe--for much lower than its $15 billion preferred-stock valuation.

But Ali got lucky on Facebook once already, and even in a recession he hasn't given up hope that it could happen again.

Next in the series: When the economy heads south, online crooks get busy. A computer security expert fights back.