(Editor’s note: Consultant Jonathan Klein takes a look at investment numbers, and suggests investing in mobile is more attractive than social networking.)

Did you know that there were 219 major Hollywood movies released in 2005? Why 219? Why not 419? You could argue the reason is supply. There are only so many good scripts, actors, and directors. However, if you happened have seen The Island, Bewitched, or Stealth (given their numbers, odds are you didn’t), it would seem that supply ran out well before 219. I actually believe that demand is a far bigger factor. People have a certain amount of time and money available for movies and that amount holds pretty steady. It turns out that 200 to 250 is the number of movies that the market can support.

The same logic holds true for venture funded companies. Corporations can only absorb so much new technology. Advertisers have only so much money in their budget. Consumers can only spend so many hours online. Ultimately, demand determines how many venture investments the market can support. The Internet bubble serves as a cautionary tale of what happens when investment outstrips demand. No one wins. Not even companies with great people and ideas. The pie only expands so fast and when there are too many start ups, demand is divided into too many little slices to create successful companies.

Understanding the demand side of venture • measuring venture investments from the point of view of the end customers companies are targeting • is one of the goals of my company’s new quarterly Follow the Money report. Our Q2 report shows overall investment levels in IT appear to be healthy. However, drilling down one level reveals a steep rise in consumer investing and drilling down one more level provides a great example of one segment with healthy levels of investing and one that may be overheated.

During Q2, nine companies received funding to provide consumers services via their mobile phones while 25 social networking companies received funding. Unless you are willing to believe that social networking presents nearly three times the revenue opportunity for start ups as mobile services (which seems unlikely), there are only two conclusions • either VCs are underinvested in mobile or social networking is overheated.

Maybe the market can absorb all of these social networking companies, but the evidence points toward social networking being overheated.

  • There is very little to prevent a glut of social networking companies from forming. That is in stark contrast to mobile where carrier relationships and technical expertise form barriers to entry.
  • Social networking is driven by the network effect. That points to demand going to the first mover start ups and to large companies, like Yahoo or Google, who can leverage their existing base to create critical mass. That means second and third movers need something truly differentiated to succeed.
  • Even top tier social networking companies are struggling to generate enough quality page views • in other words, there is not enough demand.

    The final conclusion • Unless the social networking company you are considering joining or investing in has a secret sauce, you’re better off going mobile.