There are a lot of articles and opinions out there that social media is in a bubble. LinkedIN ($LNKD) goes public at a high valuation. Other stocks that have filed paperwork to do an IPO have big numbers attached to their upcoming debut.
So, the hard questions for investors; is it a bubble or not? Does it matter?
To give you some background, I not only play the markets but I co-founded an angel organization in Chicago that invests in start ups. We are starting to see a lot of deal flow that involve some aspect of social media. I subscribe to some angel email services from all over the country, and I see lots of companies today that want money to invade the social media space.
The answer on the bubble, it depends. I could make an argument that Facebook ($FB) at $100 billion is cheap. It is a legacy platform that other businesses are building off of. Facebook is sticky, even if you think it’s a time waster. A lot of this social media stuff just becomes background noise. There is so much of it you tune it all out and go with what you are used to. I think that is the appeal of Google+ for a lot of folks, you can tune out a lot of extracurricular noise.
Certain companies are trying to reinvent Facebook. They are riffing on specialized aspects of Facebook and compartmentalizing them. Small little apps that segment the market. Many of them are receiving money from angel investors. The bulk of them could be considered a bubble.
Companies that I like in the social media space integrate and work across platforms. They take the best aspects of social media and quantify it-or make it easier for us to interact with social media. It’s very hard to know who those companies are-or if you do invest, how they will pivot and grow. Help Scout is an example of a company that I would want to make an investment in if they applied to Hyde Park Angels. One of our companies, ReTel, developed the site favo.rs that looks really cool.
Good angel investors take portfolio risk. They analyze companies, try to envision the future and then they put a little money into a lot of different companies. There is no way one person is smarter than the market and you never know which company is going to take off. In 2005, how did the angels know that Facebook would eclipse MySpace or Bebo? The smart angel investor would have invested in all three if they had the chance.
Contrary to what some are claiming, I don’t think there is one person that is an “expert” in social media. It’s too new, and not enough people are engaged in it every day to know exactly how it will affect things. Certain people “get it” more than others; but we are still accumulating data. I find it very useful to listen to a lot of opinions on it. There are books that are guideposts. Groundswell and World Wide Rave are good, but no textbook has been scribed yet.
I also find it funny that many businessman my age assign social media tasks to people fresh out of college and let them run with it. The college age kids might know how to use the apps, but it’s rare to find one that can critically think with the breadth and volume of experience a grizzled employee might have if they were taught how to use and target groups using social media platforms. Many people are afraid of it because they don’t understand it, or they discount it because they think it’s dumb. The publicity surrounding a bubble gives them ammo to discount social media further.
We know that certain models work, but haven’t discovered all of them so new ways of development are coming to market. It seems to me that the type of social media that will have the most impact depends on the target market you are trying to reach. It might be that you only need to reach 1000 people. If you hit 700 of them, you are a success. What’s the best tool to hit them? Might be as simple as an email. Might have to be as complex as a YouTube video, or a blog post. It just depends.
Currently, the pace of angel investment into start ups matters not to the broader economy. Virtually none of them are public, so pensions and other broader funds are not invested. Secondly, let’s say every social media company from LinkedIN to Facebook and Zynga went out of business tomorrow. Does it hurt the economy? There doesn’t seem to be systemic risk here.
If they went under, it would hurt only because there will be a lot more people looking for work. The unemployment rate might jump a decimal. The stock market might tumble for a day or two-but since none of the companies are in the averages it would be a buying opportunity.
This whole social media frenzy is part of the creative destruction of American capitalism. Because of LinkedIn and Facebook, lots of entrepreneurs had ideas and are looking to cash in. Very few of them will be successful, but some will. Facebook begat Twitter. Eventually, many of these companies will be integrated into the business of America. They will make us more productive, and if one or two went down, it would be economically damaging.
Because no one can pick the absolute winner, the only way to play it is place as smart a bet as you can, and then hope you picked the right jockey to ride the horse. Pick the right one, and you are going to make a lot of money. Machines and factories become obsolete, but people and the desire to connect are always going to be with us.
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