How StumbleUpon saved itselfFebruary 29, 2012: 12:56 PM ET
It doesn't have Facebook's huge user base or Pinterest's deafening buzz, but some people use this quiet social media service just as much, and advertisers may actually prefer putting their ad dollars in it.
FORTUNE -- StumbleUpon, the ten-year-old social site, has managed something few Silicon Valley companies have: a comeback. It may not have the buzz -- or billions -- of Facebook, but StumbleUpon has managed to right itself after a brush with obscurity to become one the most powerful sources of traffic on the internet.
Co-founded in 2001 by Garrett Camp and Geoff Smith, the content discovery service started as a novel idea. "We were trying to be your remote control for the Web, the thing that helps you figure out what to look at next," Camp explains. Users "stumble" onto web content -- a business story, a web game, a blog or image gallery -- they've never seen before and can rate it thumbs up or down. Over time, the content served up becomes more relevant to a user's taste (unlike the repercussions of using a standard TV remote). The firm's main service is free, though roughly one out of every 20 "stumbles" is paid for by a client -- the company's version of targeted advertising dubbed Paid Discovery.
By May of 2007, the San Francisco-based company had a small, fiercely loyal userbase: 2.3 million users growing 150% year-over-year. That's when Camp and Smith sold their venture to eBay (EBAY) for $75 million. It seemed ideal. eBay was surging, and Camp and Smith walked away with a good deal of cash. But things eventually soured. User growth slowed significantly. And while being owned by eBay meant not having to deal with the pressure of raising funds, other headaches replaced them. Attracting talent became harder, and products took longer to come to fruition. Two years later, Camp, Smith, and a group of venture capital firms, including Accel Partners and First Round Capital, bought the company back for a reported $29 million.
That's when a turnaround -- or liberation -- of sorts took hold. StumbleUpon has rolled out a number of major improvements since then: a web-based approach to "stumbling" in lieu of a browser plug-in, mobile apps for Apple's (AAPL) iPad, iPhone, and Google's (GOOG) Android, and a major redesign that went live last December. Growth picked up again. The company reports more than 20 million registered users "stumbling" 7 hours a month, the same amount Facebook users spend fiddling with their profiles. Desktop and mobile use is on the rise as well: 20% month-over-month and 35% month-over-month, respectively.
All in all, that kind of growth is impressive for a company that hasn't had the attention of, oh, Twitter. "They're like a workhorse company," says Rebecca Lieb, an analyst at the San Mateo, California-based Altimeter Group. "They've never been glitzy and fashionable. They've never been the flavor du jour like a Facebook or a Google, or even sites that had moments that shined then faded into the background or faded into obscurity."
StumbleUpon, according to eMarketer, became the largest social referrer of web traffic to other Web pages during the third quarter of 2011 -- 1.2 billion referrals a month, according to StumbleUpon -- well beyond the likes of Facebook and Twitter. (According to the eMarketer report, StumbleUpon referred 49% versus Facebook referred 38%.) Both Facebook and Twitter also use ads that link to external web sites as their largest revenue source. Facebook, of course, places its targeted ads in areas like the "Sponsored" bar to the right of the News Feed and Twitter implements ad features like "Promoted Tweets," both with the hope that users will see them, find them relevant, and actually click.
StumbleUpon's targeted ad model operates differently, merging the advertorial into regular content. In actuality, the site a user is looking at every 20 "stumbles" or so was in fact paid for by one of the company's 75,000-plus advertisers. Although each ad is casually labeled as such, chances are some users won't notice the difference each and every time. "Their ad unit is really connected to the consumer experience," explains Nikhil Sethi, co-founder of Adaptly, a startup that specializes in helping companies properly advertise on social platforms like StumbleUpon.
According to Sethi, some advertising clients prefer to allocate the majority of a campaign budget to StumbleUpon. When Arby's wanted to get the word out about a new burger last year, they employed Adaptly to help advertise equally among Facebook, Twitter, and StumbleUpon. Within days, Sethi's company realized that nearly 91% of user engagement around the video ad campaign -- in other words, people interacting with the ad -- was happening on StumbleUpon. As a result, Arby's shifted the rest of the money for that campaign away from Facebook and Twitter and over to Camp's service. And a content web site like Buzzfeed, which also advertises via StumbleUpon, may see traffic in the millions for some posts.
StumbleUpon won't reveal its ad revenues. They're almost certainly nowhere near Facebook's, which eMarketer predicts will hit almost $5.1 billion this year. Still, according to Camp, the company will focus its efforts this year on expansion domestically -- potentially doubling its staff of 100-plus over the next year -- and internationally, localizing the service for new markets like the U.K. StumbleUpon may not have the userbase of Facebook or the deafening buzz of Pinterest. But at this point, it could be that StumbleUpon doesn't need either.