Social media investment was a red-hot theme on Wall Street and in private equity markets during 2011, but as the year winds to a close it remains unclear whether these risky startups that investors have been throwing money at are smart investments or sucker bets.
Most likely these publicly traded social media startups are both--that is, some will grow into highly successful businesses, while others fade into the rubble of corporate failure like Pets.com and other dot-com failures of the 1990s.
For now, it's worth looking back at what happened to the social media startups that went public by selling stock in IPOs during 2011 to see how they fared.
Zynga was the Wind Gauge for Social Media Investment in 2011
The last social media company to go public in 2011 was Zynga Inc., maker of FarmVille and other popular Facebook games, and its debut was widely seen as a barometer of changing fortunes for social media investment. Zynga's stock was priced at $10 share in its IPO debut on Friday, but those shares had dropped 5 percent to $9.50 by the time the market closed on the first day of trading.
Zynga's disappointing first-day drop reflects what is happening both with the broader stock market (it's been in decline again) and in the trendy social media sector (most social media IPOs started well this year, with big price increases on their first trading day, but languished in the weeks and months that followed. )
Now Zynga's failure to enjoy a first day price pop suggests the wind may have shifted for these startups. After more than a year of a year of excitement in venture capital and private equity markets, social media startups appear to be falling out of favor with investors.
Even though most of those going public this year rose sharply on their first day of trading, as the end of the year approaches many are down sharply. Few look like such great bets any more.
LinkedIn: Best Social Media Investment of 2011
There were some successes, for sure. Among the social media firms that went public in 2011, LinkedIn Corp. enjoyed perhaps the strongest success throughout the year, despite the many business challenges it disclosed when it filed to go public. By mid-December, its share price stood at $66, up nearly 50 percent from when it went public at $45 back in May.The other startup holding onto significant gains was high-profile social couponing service Groupon Inc. Groupon, one of the hottest social shopping companies, went public in November at $20 a share and closed Friday at $23, still up 15 percent.
Clinging to a better gain was late entrant Jive Software, which makes Facebook-like tools for companies to use for collaborating with clients and business partners. It went public at $12 a share on December 13 and was up 25 percent at $15.10 on December 16. Of course, it remains to be seen if Jive can sustain its gains since it's only been trading one week.
Another social media company that is still above water from its IPO is Angie's List Inc., an Indianapolis-based consumer reviews site that launched in the mid-1990s and is way past the startup stage. Angie's List, like many social media firms, is still not profitable, according to its stock paper filings with federal regulators. Angie's shares debuted at $13 in November and were up about 28 percent to close at $15.73 by December 16.
Already, though, these young companies have led investors on roller-coaster rides above and below their IPO prices. Angie's List, for example, fell 15 percent to $11 last month before rebounding recently. Groupon's shares tanked 13 percent, to $17.22, within three weeks of its initial stock offering.Social Media Investment Duds of 2011
But other social media companies that went public in 2011 remained significantly under water from their IPO price as the year wound down. Internet radio company Pandora Media went public in June at $16 a share and closed Friday at $10.55, down 34 percent.
Another Internet company that whose shares went into freefall was Demand Media Inc., which creates online content at eHow and also owns social media services such as the Pluck for building communities online and CoverItLive for conversations about real-time events. Demand Media was one of the first Internet companies to go public in 2011. Its shares were initially priced at $17 in January, but fell 59 percent to close at $7.05 on Friday.
In the United States, Friendfinder Networks may have been the biggest Internet IPO bomb of the year. It went public in January at $10 a share; the price had dropped 94 percent, to 61 cents, by December 16. Friendfinder was purchased by Penthouse and sells the Penthouse brand online through a bunch of dating, video and entertainment sites.
Another Internet company with social media features that saw its newly public shares decline this year was HomeAway Inc., vacation home rental service. It went public at $27 a share in June and closed Friday down 22 percent, at $20.88.
Chinese Social Media IPOs Tanked
Three Chinese social media players that went public in 2011 fared much worse. Chinese Facebook clone Renren, one of the top Chinese social networking sites, fared horribly with investors-- by mid-December, its shares had plummeted 75 percent from their initial offering price. Renren went public at $14 and had dropped to $3.45 by last Friday. Jiayuan.com, an online dating service that went public in May, also saw its shares fall. It closed at $6.21 on Friday, down 43 percent from its $11 IPO debut. And the YouTube of China, Tudou Holdings Limited, went public in August at $29, only to see its shares drop 61 percent to close Friday at $11.12.
Social Media Investment Craze May Have Peaked
For much of the year, shares in social media startups tracked the broader market, rising with investor hopes through August and then turning around and declining for most of the fall. The fall of social media shares, though, was even steeper than that of the broader American stock market, suggesting these are riskier investments.
It may well be that Zynga's lackluster IPO in December is a sign that the much talked-about social media investment bubble is hissing as it starts to lose air. Zynga, after all, has widely been seen as the king of social media games, one of the hottest areas in social media.
If You Must Bet on Social Media, Consider Spreading the Risk
Investors wanting to plunk money down in this trendy sector may do better to wait for the expected stock offerings from Twitter and Facebook in 2012. Or if they can't wait, consider betting on the broad sector rather than individual companies.One new exchange-traded fund launched in 2011 to investexclusively in social media companies. Called Global X Social (SOCL), it started trading on the Nasdaq in November and hasn't fared too well, dropping a lot more than the S&P 500 during the month it's been trading.
Still, social media investment is more of a long-term bet, since it will likely take a long time for these startups to prove themselves as sustainable, profitable businesses. The advantage of buying a fund specializing in social media, if there is any, is that you'd be betting on a broader basket of stocks rather than one or two, so possibly the big winners could make up for the likely losers.
The Global X Social Media Index ETF tracks an index called Solactive Social Media, which consists of about 25 firms, a mixture of startups like LinkedIn and Groupon as well as established players moving into social media such as Google. Be advised that the fund heavily invests in social media startups in China, a highly competitive and risky market.
