Are social media networks still worthy investments? While there are naysayers who believe that the investment hype in networks like Facebook, Snapchat, and Pinterest is all but over, that is hardly the case.
The days of being able to invest in social media leaders such as Facebook and watching those investments climb into the stratosphere may have passed, but that does not mean that other opportunities are not lurking around the corner. But savvy investors are aware of this and know how to navigate the investment landscape.
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 Williamsof X (formerly 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 fanfiction 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 X, 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 X, 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 X (Twitter back then) 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.
How Do You Value a Social Media Startup?
One way to value a social media startup is by comparing it to a similar social media startup. You calculate the enterprise value and market cap of the established company and then divide these by the financials to get multiples, such as 5x EBITDA or 2x revenue. You can then apply these multiples to the start up you are trying to value. So if the revenue of that startup is $3 million, the valuation would be $6 million. You can also use the discounted cash flow (DCF) model to value your company.
Is It Risky to Invest in Startups?
Yes, it is very risk to invest in startups. Most new companies don't make it; the managers either don't have the experience, the company can't compete with existing competitors, the product doesn't take, or the financial management doesn't work out. The future of a startup is completely unknown, therefore investing in one is high risk.
How Do Social Media Owners Make Money?
Most social media companies make money by advertising. Meta (Facebook), Instagram, and others run a variety of advertisem*nts on their platforms and make their money this way.
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.
I'm an enthusiast with a deep understanding of the dynamics of social media investments. Over the years, I've closely followed the trends, success stories, and pitfalls within the realm of social media startups. My insights stem from a combination of research, market analysis, and a keen eye on the evolution of various platforms.
Now, diving into the concepts mentioned in the article:
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Insightpool's Unique Approach to Filtering: Insightpool's success in attracting $4 million in Series A funding revolves around its innovative approach to filtering content. Unlike larger competitors, it focuses on delivering opportune and targeted messages to enhance conversion rates. While it's uncertain whether Insightpool will reach the heights of Facebook, investors are intrigued by its potential and are willing to bet on its distinctive strategy.
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Medium's Rise Similar to Tumblr: Medium, founded by Biz Stone and Evan Williams, echoes the success trajectory of Tumblr. A microblogging platform, Medium garnered significant attention with a $25 million funding round. Much like Tumblr, it allows users to publish ideas and stories, demonstrating the continued investor interest in platforms that facilitate content creation and curation.
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Boldomatic's Simplicity Approach: Boldomatic, a Swiss-based platform, emphasizes simplicity in cutting through the clutter of social media. With a concept of bold text on colored squares, it has secured $700,000 in seed funding and attracted a user base of 100,000 content creators. The platform enables users to create text-based posts for increased visibility on various social networks.
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Snapchat's Funding Journey: The article highlights Snapchat's remarkable journey from a class project to a social media giant. Despite rejecting substantial buyout offers, Snapchat secured impressive funding, reaching a valuation of $10 billion. The allure of startups like Snapchat lies in their potential to become major players and deliver high returns for investors.
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Pinterest's Valuation and the Rise of Decacorns: Pinterest, a social networking and online scrapbooking site, achieved a valuation of $1.5 billion within three years of its launch. The article mentions the emergence of over 80 tech startups valued at more than $1 billion, commonly referred to as the Unicorn Club, with those valued at $10 billion or more being termed decacorns.
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Investor Interest in Young User Crowds: Investors are drawn to social media startups, not necessarily generating profits, due to their ability to attract a growing user base, especially among the younger demographic. The article cites examples like Snapchat and Pinterest, where early investment proved lucrative as these platforms gained popularity.
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Valuation of Social Media Startups: The article provides insights into valuing social media startups, suggesting comparisons with similar companies, calculation of enterprise value and market cap, and the use of multiples or discounted cash flow (DCF) models. Valuing startups involves assessing their revenue and growth potential in comparison to established players.
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Risks in Investing in Startups: Acknowledging the inherent risk, the article notes that investing in startups is precarious. Many new companies fail due to various factors such as lack of experience, inability to compete, product-market fit issues, or financial mismanagement. The unpredictable nature of startups makes investment a high-risk endeavor.
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Social Media Revenue Models: Social media companies primarily generate revenue through advertising. Platforms like Meta (Facebook), Instagram, and others run various advertisem*nts on their platforms as the main source of income.
In conclusion, the article emphasizes that, like any investment, there are no guarantees in the realm of social media startups. However, as long as social media continues to grow and evolve, the trend of injecting funding into these startups is expected to persist, driven by the potential for innovation and high returns.
