Like it or not, the reputation graph is here to stay

Klout, the online reputation-ranking service that recently raised a Series C round of financing estimated at $30 million from a host of venture capital firms, has taken some pretty heavy fire from critics over the past year. Some people dislike the way the company creates profiles on people without their permission, and others don’t appreciate being reduced to an arbitrary number that can change at any moment. But while Klout’s new round of funding doesn’t guarantee it will actually be able to build a business, the need for some kind of reputation-ranking system on the social web isn’t going away. If anything, it’s becoming more important with every passing day.
There have been rumors for some time that Klout was working on new funding, and the company confirmed on Tuesday¬†it has closed a “strong” round led by Kleiner Perkins Caulfield Byers, along with Venrock and Institutional Venture Partners. The San Francisco-based startup hasn’t confirmed exactly how much money it raised, but sources have said it’s more than $30 million, which would give the company a market value of about $200 million. That’s not bad for a company CEO Joe Fernandez started in 2007 after spending months with his jaw wired shut following surgery.

Does the social web need a way to keep score?

Obviously, Klout still has to prove that it can generate revenue from its attempt to build a reputation graph, or what Fernandez has called a “PeopleRank” system similar to Google’s PageRank¬†(s goog) for web pages. The company’s financial backers clearly believe it is (or could become) the leader in such an effort, as Venrock partners David Pakman and Marissa Campise noted in separate blog posts about their new investment. Campise said she believes Klout will be the “global standard” for identifying and measuring influence on social networks, and Pakman compared what the company does to media measurement services like Nielsen (s nlsn) and comScore: (s scor)

In every other mass media, measurement provides a benefit to the advertisers who subsidize that media… Klout has the benefit of being able to measure actual data, not inferred data. They aim to score the entire social web.

Keeping score is one of the things that seems to set many critics of Klout off. As Fernandez has noted in a number of interviews, people don’t like the feeling they are being marked on their social behavior — and in some cases getting what appears to be a failing grade. Others have complained that Klout creates “shadow profiles” for users based on their Twitter activity, regardless of whether they have actually signed up for the service or not. Author Charles Stross wrote a long post arguing this approach is fundamentally “evil,” and connecting to Klout is the “internet equivalent of herpes,” since anyone who uses it risks infecting their friends.

Other critics have focused on the arbitrariness of Klout’s measuring system, which the company recently tweaked in a way that caused most scores on the service (including Fernandez’s own score) to fall. Although Klout defended its changes by saying that it was trying to make them more reliable — and less susceptible to “gaming” attempts aimed at boosting scores through fake social activity — many complained since they didn’t know what Klout’s algorithm was based on, it wasn’t worth paying any attention to. The company’s defenders, meanwhile, argue that no one really knows exactly how Google’s algorithms work either, but that doesn’t stop them from using the service.

A reputation-based economy needs a measurement system

Sequoia Capital partner Roelof Botha recently noted, in response to a question from Hunch founder Chris Dixon, (s ebay) that services like Etsy and Kickstarter — which some have argued are the foundation of a “sharing economy” — are built on a web of trust, in which users are willing to engage in creating or buying products from others in part because they know (or can find out) enough about them to form such a relationship. This reputation-based economy requires some kind of measurement system, and possibly many competing systems, just as the traditional media market needs services like Nielsen and comScore.
We may not like the idea that we’re being measured, but it’s happening regardless — and Fernandez argues Klout is actually an improvement on some of the behind-the-scenes reputation ranking other services engage in, since it’s more open about the process. Klout also provides rewards or “perks” from its advertising partners to users based on their scores, such as discounts on airplane flights or the chance to test drive new cars, and this is a big part of how it generates revenue.
Whether Klout can create a “PageRank” for the people-based social web that accomplishes what Google’s PageRank did for the early web isn’t clear. There are dozens of competitors aimed at the same goal, including PeerIndex and Kred, and both Twitter and Facebook have their own internal reputation-ranking systems that could easily be externalized (some have argued eBay could do this as well). But there’s no question that someone is going to do it, because the social web requires it in order to function properly. As users, the most we can hope for is that the process is relatively obvious and that we get some benefit from allowing ourselves to be tracked.
Post and thumbnail photos courtesy of Flickr users Danny Cain and Andres Rodriguez