Investing In Social Media Startups? Read This First

Are social media networks still worthy investments? While there might be some naysayers who believe that the hype behind tech investments in networks such as Twitter (TWTR) and Facebook (FB) is all but over, that is hardly the case. The days of being able to invest in social media leaders such as Facebook and then watching those investments climb into the stratosphere may have passed, but that does not mean that other opportunities are not lurking around the corner, and savvy investors are well aware of this.

New Social Media Networks Drawing Funding from Investors

TechCrunch recently reported that Insightpool attracted some $4 million in Series A funding. During its seed round, the startup social media network drew half a million in funding. What is it about Insightpool that has investors willing to throw their money at it? While Insightpool takes an approach similar to other social media networks, what truly sets the site apart from its larger and more well-known competitors is its approach to filtering. The result is the delivery of an opportunely-timed message to boost the chances of conversion. Whether or not Insightpool has the staying power to become the next Facebook remains to be seen, but investors are clearly willing to bet on it.

Another social media startup worth watching is Medium. Created by Biz Stone and Evan Williams of Twitter, this microblogging platform offers users the opportunity to publish ideas and stories. Users can also use the site to curate their favorite stories and make recommendations using their networks. If you think it sounds a bit like Tumblr, you could be right. While no one really thought that a site that was originally dedicated to providing a platform for teens addicted to publishing fan fiction could ever take the world by storm, that's what it is well on its way to doing. Medium is following in the footsteps of Tumblr. Last year, Medium reported that it had closed a stunning $25 million round of funding.

Cutting Through the Clutter in Social Media

When it comes to cutting through the clutter of the social media world, Swiss-based Boldomatic is hoping that simplicity will come out on top. Based on a concept of publishing thoughts in bold text on a colored square, Boldomatic is already drawing support. The content-creation platform recently announced that it has closed $700,000 in seed funding and has acquired a user base of some 100,000 content creators. Founded in 2012, Boldomatic gives contributors the freedom to create text-based posts for increasing visibility on other social networks, such as Twitter, Facebook, Instagram, and Pinterest.

Lessons Learned from Snapchat

With an ever-increasing number of social media networks putting their own spin on social engagement, the potential opportunities provided by such companies to deliver high returns for investors cannot be denied. While social media startups might seem like a dime a dozen, investors are all too well aware that a fledgling startup today could be tomorrow's Snapchat. What began as a class project for a couple of Stanford University students with absolutely no business experience, was later introduced to the world as Snapchat in 2012.

Within three years, Snapchat had become one of the most popular social media and messaging apps in the history of social media. As Snapchat grew in popularity, investors came knocking at the door with their checkbooks. Although the Venice Beach, California startup had yet to make a penny, Facebook submitted a $3 billion all-cash offer. The two 20-somethings behind Snapchat soundly rejected the offer. While users' messages on Snapchat might disappear, the buyout offers did not. Before long, rumors began circulating that Google (GOOG) had entered the bidding war with a $4 billion offer. No dice. Perhaps because the startup decided to turn down such solid offers, Snapchat was able to rake in an impressive amount of funding.

Over the course of six rounds, the social media startup raised almost $650 million in funding. According to Nasdaq, Snapchat attained a $10 billion valuation due to the latest round of funding late last year. Most recently, the firm announced yet another round of funding that could push its valuation up to $19 billion. Now, rumors are again swirling that Snapchat could be headed toward an IPO.

Snapchat is not the only social media startup with investors lining up at the door. Within three years of its launch, Pinterest, the social networking and online scrapbooking site, was valued at $1.5 billion, despite having no revenue. InfoWorld reports that there are now more than 80 tech startups valued at more than $1 billion, known as the Unicorn Club. The number of startups with high valuations has continued to grow at such an exponential rate that those startups valued at $10 billion or more are now known as decacorns.

What Is Attracting Investors to Social Media Startups?

Why are investors so willing to pour money into unproven business models that are not even generating a profit? One of the biggest reasons driving investors to fund social media startups is the ability of such firms to attract an ever-increasing crowd of young users. Snapchat, which quickly became a popular hit with teens, is just one case in point. The online habits and trends among the younger crowd can evolve quickly. Investors are well aware that hedging their bets early by investing in such startups could prove to be quite lucrative later on.

Pinterest is another excellent example. The San Francisco-based company attracted investments of $225 million and was recently valued at $3.8 billion, according to The New York Times. Beyond the potential for a massive increase in valuation, investors are well aware that even though a social media network may not be generating a profit today, that does not mean that the potential is not there. Take Twitter, for instance, which has proven quite successfully that it is possible for a social media network to yield a profit with a large enough audience. Furthermore, when Twitter did make an initial public offering, it managed to pull in a $25 million market cap on the first day of trading, despite the fact that it had yet to generate a profit at the time. With that kind of growth potential available, it is little wonder that investors are practically stepping over one another to invest in unproven social media startups.

The Bottom Line

As is the case with any investment, there are never any guarantees, but as long as social media continues to grow and evolve, and at a rapid pace, the trend among investors to inject funding into social media startups is likely to remain strong. 

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