News Analysis

Social media IPOs: Eight investment issues of social network companies

Is the social media market poised for a roster of IPOs?

  1. Investors drive up social networking stock
  2. Is the time right for social media IPOs?
  3. US law could force companies to go public
  4. The social networking business model
  5. The value of social media to investors
  6. Opportunities appear as social network market matures
  7. The risks and rewards of timing an IPO
  8. David Kirkpatrick discusses the implications of a Facebook IPO

 

Investors drive up social networking stock

Speculation is rife that the social media sector is about to become awash with IPOs, as investors clamour to stake their claims in what appears to be a land grab for the space. But despite fears of a "bubble 2.0", are the likes of Twitter and Facebook ready to go public yet?

At the moment few know how social media companies are channelling their investment and there is a great deal of speculation about the revenue streams they are yet to tap. However, many commentators have pointed to the recent flurry of fundraising as proof they are gearing up for a series of IPOs this year.

Is the time right for social media IPOs?

But Augie Ray, California-based analyst at Forrester, says the time is not right for most social network sites to float. "A lot are not in a rush to get an IPO. Twitter and Facebook, for example, seem more interested in continuing to develop their platforms rather than herding for access to capital," says Augie Ray.

As investors continue to pump increasingly large cash injections into their coffers, (Facebook received $2bn from Goldman Sachs this month and Twitter raised $200m in December) there seems little urgency for IPO-generated capital. "I'm sure many would enjoy a substantial public offering, but the Goldman deal indicates that investors are not in a rush to see them do so," adds Ray.

US law could force companies to go public

Facebook founder Mark Zuckerberg has said he is against the idea of an IPO at the moment. But he may have little choice as the company is in danger of exceeding the maximum number of 500 investors legally allowed for a private company. Consequently, US laws could force it to go public.

Although not exactly the same as getting an IPO, the company would be forced to open its accounts. "Zuckerberg would rather not have to manage the expectations involved with having to disclose more financial information," says Ray. In other words, he would have to answer some tough questions accounting for the company's recent valuation of $50bn, as revenue and profitability are disclosed.

The social networking business model

Indeed, the problem with much of the current speculation is a lack of public information about these companies. And so, not surprisingly, opinions as to the viability of their business models remain divided.

Gordon MacIntyre-Kemp, lead social marketing consultant at business marketing firm Intelligise, is firmly in the camp that believes many of the valuations are over-inflated. "When you compare Facebook's $50bn valuation against other companies valued at that amount and contrast their revenues streams and profitability - you have to ask some serious questions. I wouldn't say there's a bubble at the moment as no shares are being traded, but there's definitely the potential for one."

Bob McDowal, consultant to research firm TowerGroup, is equally skeptical: "I would draw analogies with the dot.com bubble. We don't even know what the revenue model is for these businesses yet."

The value of social media to investors

The question as to where the value lies for investors remains uncertain - particularly for Facebook, which has so far amassed information on one-twelfth of the world's populous. In December the Federal Trade Commission issued a proposed framework that would permit Facebook users to block advertisers from accessing information, a move which could seriously damage the site's potential revenue streams with advertisers.

Gordon MacIntyre-Kemp believes there is far more value in LinkedIn, as its revenue streams are located in the business market. LinkedIn is tipped to become the first social network company to get an IPO, which industry insiders say could take place as early as the first quarter of this year. "It is one of the few companies that will stick around," he says.

Opportunities appear as social network market matures

But Richard Holway disagrees with the social media naysayers. Social technologies could have the same impact on our lives as the internet has over the past 10 years, although not all social media companies will make significant returns to investors over the long term, he says. "But, just like in the 1998-2000 round, you only had to get one Google to cover up a hundred other mistakes," he wrote in a recent blog post.

Ray says companies are still in the process of exploring ways to monetise their platforms. Facebook, for example, may decide to launch a "Facebook credits" system to commercialise the site and allow consumers to buy things on that platform with a PayPal-like method, he suggests.

The risks and rewards of timing an IPO

Meanwhile smaller social media sites will soon converge or be acquired, as the market starts to consolidate. "It could be a year where we also see some fairly high-profile failures," he says.

And while Twitter and Facebook continue to grow, Groupon will face increasing competition from sites such as Living Social, he says. "Ultimately the idea of consumers buying a deal a day is not that unique. I think it will be challenged to provide more services."

Eventually all companies will have to go public or be bought out, they can't continue to add owners and not push the 500 investor boundary set by US law. But they will hold off for as long as possible because, as they continue to build value, the market will appreciate, says Ray.

In a still nascent social media sector it is early days to predict where the market will go with any degree of certainty. However, if all the hype surrounding the "game-changing" power of the medium is to be believed, some companies may well benefit from waiting for confidence to build in their business models before taking out an IPO. And their billion-dollar investors at least will certainly be keen to maximise their returns.

Video: David Kirkpatrick discusses the implications of a Facebook IPO

David Kirkpatrick is author of The Facebook Effect, an account of the development of the social networking company and its founder and CEO Mark Zuckenberg. Here, Kirkpatrick discusses why Mark Zuckenberg might be reluctant to pursue the IPO option:


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