Backfence, the once-hyped citizen journalism startup, is closing all its 13 local sites, after a series of management troubles over the last year, and inability to get any local traction editorially. CEO Mark Potts has also left, and told me in an e-mail that the investors are “continuing to talk to potential buyers or new investors, but have decided for business and operational reasons to shut down the sites rather than operate them without sufficient support.” Though the notice on the local sites say otherwise at this point: “The people behind Backfence still believe strongly in the need for community information services, and we hope to apply all that we’ve learned from our experience here to new endeavors in the future.” So for all intents and purposes, the venture is dead.

The startup received $3 million funding in 2005 from SAS Investors and Omidyar Network, among others, and quickly opened local sites in Virginia and DC area, and then later bought the remains of a Bay Area local journalism effort.

It seemed like a good idea at the time. With blogging flourishing and citizen journalism just budding, Mark Potts and Susan DeFife thought they had a winning formula for a new kind of journalistic enterprise. One evening in the summer of 2004, they sketched out their common vision: A series of hyperlocal, news-oriented Web sites whose tone and content--news, commentary, blogs, photos, calendar listings--would be supplied primarily by the people who knew each community best, its residents. By May of 2005, the venture, dubbed Backfence.com, was up and running, with sites serving two affluent Virginia towns in Washington D.C.'s suburbs, McLean and Reston.

The idea of virtual town squares seemed so promising that within months Potts (a veteran reporter and editor at the Washington Post and cofounder of its digital division) and DeFife (founder and chief executive of Womenconnect.com for women in business) had attracted $3 million from two venture capital firms, including one headed by eBay founder Pierre Omidyar. The money funded an expansion program that would have made Starbucks proud.

By early 2007, Backfence had grown to 13 sites serving towns around Washington, Chicago and the San Francisco Bay area. The partners began talking about creating as many as 160 sites in 16 markets.

And then? And then the bottom dropped out. Backfence's rapid expansion burned up its $3 million war chest. The partners have split; Backfence's staff, which once numbered as many as 25, was laid off. The company's online communities are largely ghost towns now. "We ran out of money," says a somewhat chastened Potts today. "And we ran out of runway."

New ventures fail all the time. But it could also sound a cautionary note about the present--and immediate future--of hyperlocal news sites. As big-media companies and entrepreneurs alike rush into the hyperlocal arena, it's worth pausing and asking: Is there a real business in this kind of business?

So far--and admittedly it's still very early --the answer is no. A few of the estimated 500 or so "local-local" news sites claim to show a profit, but the overwhelming majority lose money, according to the first comprehensive survey of the field. The survey, conducted by J-Lab: The Institute for Interactive Journalism (affiliated with the University of Maryland's Philip Merrill College of Journalism, as is AJR), documents a journalism movement that is simultaneously thriving and highly tenuous.

We are sorry to announce that Backfence McLean will be ceasing operations within the next few days.

We have been honored to have been members of this vibrant local community over the past two-plus years. Your postings and discussions on Backfence have been been a reflection of the strength and interests of the members of the community. We hope we have provided you with a valuable local forum. Unfortunately, business issues are forcing us to close our doors and shut down the site.

The people behind Backfence still believe strongly in the need for community information services, and we hope to apply all that we've learned from our experience here to new endeavors in the future.

Thank you for your interest and participation in Backfence. Hopefully, we'll see you around the neighborhood.

Mike Orren of Pegasus News proves once again that he’s one of the smartest people around when it comes to hyperlocal efforts. I would advise anyone considering such a venture to pay attention to what Mike says. One of his “truths” is that data is what brings people to hyperlocal sites, and many traditional news people are hung up on other types of content. And building databases is a lot of work.

There are two big problems with most hyperlocal efforts.

One, we get hung up on content when content isn’t the problem. The question is how do you make money in a disintermediated, distributed media paradigm? Experiments in hyperlocal media don’t fail because of content; they fail, because they can’t deliver the promise of sustainable revenue. It is the advertising paradigm that’s the real problem, not how to make more or “hyperlocal” content that such advertising will support.

This is why I keep harping on organizing the local web and building databases of knowledge at the local level rather than trying to make another content play. Google (the hyperlocal winner) has proven that advertisers will pay a premium for actual business leads, but that has never been a part of mass marketing. How we put advertisers together with users is the key, and “news content” isn’t the only way to do that.

Jeff Jarvis is absolutely correct when he states that network dynamics provide the revenue key for tomorrow, but that key will be more about direct marketing or micro marketing than anything resembling the old reach/frequency model. And Mike Orren is spot-on when he states that “little crumbs” of data ARE news at the hyperlocal level.

Two, in terms of building sites that appeal to “local” people, we simply cannot begin with revenue assumptions. In fact, I would argue that this guarantees business failure right out of the box, because the whole business of local advertising is evolving. How on earth can we create a business plan based on revenue when we don’t know what that revenue play will be? We simply must have the courage to move forward to build audience before we tackle monetizing that audience. If we do this, we’ll build things differently, because we’ll approach the process differently.

I believe strongly that niches are where it’s at downstream and that the long tail is the economic model for tomorrow’s media, so I very much like the “idea” of hyperlocal. But really, folks, Google is the hyperlocal model and their global mission ought to be our local mission — to organize our community’s information and make it universally accessible and useful.