Let's put aside their astounding $41 million round. I know it's crazy, but if they become the next Facebook or Twitter it will have been a great investment. The thing is, though, they won't.
Color is actually a legitimately innovative twist on social. Their idea of "implied" social graphs, versus tediously managed ones, is a significant leap forward.
When many now have hundreds or thousands of Facebook friends, relevance is becoming a huge problem on social networks. Each of my status updates is probably meaningful to only 10% of my followers, the problem (as the old marketing adage goes) is figuring out which 10%.
Color's use of location to build ad-hoc social networks is brilliant. It tackles the relevance issue from a welcomed new angle: whose photos matter to you? Not only your friends', but those of people near you in real-time, as well. And the best part is: no management required.
It also could spark a mini social revolution by serving as an unprecedented ice-breaker between strangers.
But here's why I think Color will ultimately fail: It is not designed to work as a small network, only as a massively large one. This is a fatal flaw, because if the experience for early users is bad, it will never be able grow to the scale at which it would have become useful.
In other words, you can't launch an application that only works at scale; it needs to work with few users, too, so that it can get to scale.
There are two general approaches to solving this problem: the "bowling pin" strategy that Facebook used (starting with a single, dense network, then going after other self-contained groups), or the "single player" approach that Delicious used (at first it was a useful bookmarking app for yourself, and then later on at scale it became social). [Note: I have to cite Chris Dixon for coining both of those useful metaphors, by the way.]
Even with the ever-increasing prominence of iPhones and Androids, it is exceedingly unlikely that you'll be at a location where multiple people own those phones, have downloaded color, and are using the app at that precise moment.
The saturation requirements for a synchronous, location-based social app are impossibly high. At least for the time being.
Having said all that, if anyone has a chance of solving this problem it's Color. The technology, design, and genuine innovation here are all fairly impressive, but it is highly unlikely that the necessary factors will converge to allow this network to take off. Then again, that's probably what people said about raising $41 million pre-launch...
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