During the technology boom of the 1990s, massive sums of capital flowed into internet startups. Investors could not wait to own a piece of every internet company regardless of profitability. A similar scenario is occurring today with investors wanting to get a piece of social media companies. Investors gobbled up shares of the first social media website that came to market and are awaiting the IPOs of both Facebook and Twitter. Let's take a look at why social media IPOs are so attractive to investors. (Initial public offerings aren't the best option for every company. Consider these factors before "going public." See The Ups And Downs Of Initial Public Offerings.)
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Unlimited Earnings Potential
Social media websites have the allure of infinite earnings because of the medium in which they exist. Social media sites can earn money 24/7. They can be constructed rather inexpensively and do not have the high overhead and fixed expenses that traditional companies have. Social media websites have a variety of ways in which they can make money, because these websites have a captive audience. This gives them an added advantage of gaining access to personalized information so that they can better target their marketing and advertising efforts.
Flashy Business Models
The technology sector has always been a favorite of investors and social media websites are no exception. Social media websites give people the opportunity to connect with others and voice their opinions. They attract a lot of users for that very reason. Social media sites are starting to replace traditional media outlets as a source for news and information. The industry is a new revolution in which people can communicate and interact with others using web and mobile platforms. (Learning how to assess business models helps investors identify companies that are the best investments. Check out Getting To Know Business Models.)
Investors are still hungry for double-digit growth at a time when many industries are showing tepid growth at best. The growth potential of social media websites is virtually limitless. Twitter has an international impact so far reaching that helped lead to the ouster of the Egyptian President. LinkedIn has grown so rapidly that a new user joins every second. It is estimated that 22% of all of the time spent online is used on social media websites. This is still the infancy of social networking. There is space for the market segment to keep growing over the next few years.
Fear also plays a big role in the dollars that the social media space is attracting. No investors wants to miss out on the next great Internet stock. Take Google for example. Google launched its stock at just $85 a share and today the stock is almost worth $500. Investors are afraid of missing out on the next great stock that has the potential for its stock price to grow exponentially. Investors bid up shares of LinkedIn to double their opening price on the first day alone. Investors would rather take a risk on a stock in its early stages than regret missing out on a homerun stock later.
The Facebook Effect
Every social media website in existence is benefiting from participating in the same sector as Facebook. Facebook is the most popular social media website and has over 600 million users. Most of the time spent on social media websites is spent on Facebook. The company has been able to attract significant investments from reputable companies like Microsoft and Goldman Sachs, which ponied up money to own a part of Facebook. The company has an $84 billion dollar valuation that is causing the valuation of other social media companies to skyrocket. (It's not just your friends who can find your information - potential employers may visit as well. See 6 Career-Killing Facebook Mistakes.)
The Bottom Line
The social media phenomenon is just beginning and is likely to attract lots of resources when the largest websites have their IPOs. Investors will continue to have an appetite for social media websites for as long as members of the websites do.