Stock trades in privately-held companies are building a head of steam as investors rush to acquire shares in social media stars of the moment. Facebook has recently raised $500 million from Goldman Sachs ($450 million) and Mail.ru ($50 million), giving the company a theoretical market value of an astonishing $50 billion and, if rumours are to be believed, positioning it for an initial public offering in 2012. Mail.ru (formerly known as Digital Sky Technologies) had previously sunk $200 million into Facebook in May 2009, and also invested in social gaming company Zynga, social retailer Groupon, and instant messaging service ICQ.
Meanwhile, private investment in professional networking site LinkedIn, and microblogging site Twitter, has also contributed to what has developed into a ‘red-hot’ trading market. So much so in fact, that it is now attracting the attention of the Securities and Exchange Commission, the US financial regulator. The agency is understood to have sent information requests to several participants who buy and sell the stock of Facebook, LinkedIn, Twitter, and Zynga.
Over the last year, several private exchanges have matched up buyers and sellers of shares in these fast-growing companies. Though the volume remains thin, the number of transactions is increasing each month. In November 2010, it was widely reported that $40-million worth of Facebook shares changed hands in an auction conducted on one such private exchange, SecondMarket. The growth of such exchanges has prompted some to question whether securities laws are being breached, given that they are allowing the trading in stocks of companies as if they were public companies, and amongst investors, who as some have suggested, may not be accredited.
Aside from the regulatory considerations posed by these so-called (not publicly traded) secondary markets, another concern quite rightly voiced by a number of industry commentators is whether we are seeing the beginnings of another dot-com bubble. Certainly, by their very nature, the value of a social media site hinges on audience size, strength of brand, advertising, and sales of virtual goods. With privately-held sites under no obligation to reveal their revenues, and given the rapid rise and equally rapid fall of sites such as Bebo, Friends Reunited, and MySpace, one would suggest that a healthy dose of caution be adopted.
Indeed, when the time does arrive for the inevitable spate of social IPOs, investors would be wise not to put all their pension funds into the social media basket – unless it is a virtual care home they are after.