While rumors abound as to which social network will jump onto the IPO band wagon first - and with the dot-com bubble of the 90s still fresh in our memory - there appears to be an alternate route for Mom & Pop investors to invest in social media and start trading NOW, before any bell sounds on Wall Street. IPOs? We don't need no stinkin' IPOs!
If you're a Mel Brooks fan, you know the now famous line "we don't need no stinkin' badges" came from his classic comedy, Blazing Saddles. The inference of that quotation, is that people don't necessarily have to play by the established rules. When you're forging new ground like the hilarious posse of Brooks' film, you can play by your own rules. Like the Wild West, such is the case today pushing the envelope in the social media space.
Instead of waiting for LinkedIn to jump the gun on Facebook, to beat them to the IPO punch, there are other options available today that will allow you to invest in your favorite social network versus buying traditional shares at the established stock markets.
Due to the heightened popularity of social networks and valuations in the billions, folks can now look to secondary trading markets like SecondMarket and SharesPost to invest. Individuals with incomes exceeding $200,000 or $1 to $2 million in assets can trade in these private exchanges.
And the opportunities don't stop there. Goldman Sachs which just bought a stake in Facebook for $450 million has also offered its wealthiest of clients to buy shares as well. California investment company NeXt BDC Capital Corp. started a closed-end mutual fund to buy shares in fast-growing private tech startups, which according to a recent report "could include Facebook and other social media."
Other mutual funds include T. Rowe Price Group which is investing in the online shopping deal site Groupon. Hanah Cho reported in the Baltimore Sun, "Price is not commenting, but after avoiding the tech fads during the Internet bubble, the company has dabbled in the social media space through several of its funds." The firm also bought shares in Twitter through some of its other holdings and has offered ordinary retail investors an opportunity to own a piece of the microblogging site.
Obviously, by investing in these new markets early, there is opportunity to garner substantial gains. But on the flip-side, without the requirement of social networks to report their earnings, investors also share the risk of investing in companies that are over-valued.
In my recent post, "Would Social Media's Bubble Burst If Facebook Were To Cash Out," I noted CNN reporter Douglas Rushkoff's analysis of the current social media boom as it related to the Goldman Sachs-Facebook deal. "This week's news that Goldman Sachs has chosen to invest in Facebook while entreating others to do the same should inspire about as much confidence as their investment in mortgage securities did in 2008. For those who weren't watching, that's when Goldman got rich betting against the investments it was selling," says Rushkoff.
The other major risk is betting on the wrong horse. The life expectancy of a social network is a big unknown. In 2005, if these same investment markets were available, many Mom and Pop investors would have seeded MySpace, with the hopes of major returns. With MySpace's recent lay-offs and its inability to compete with Facebook, how sound of an investment would that have been in 2011?
Additionally, trading in these 'outside of Wall Street markets' has drawn the attention of the Securities and Exchange Commission, which is now looking into whether these options enable social network to avoid public disclosure requirements.
So, the question remains whether or not these secondary markets are the better bet in the long run since many analysts feel that the IPOs of the dot-com ear were doomed from the start (in retrospect). With folks taking bigger and bigger risks based on unrealistic valuations, whether you buy stock through the New York Stock Exchange or from one of these newer financial vehicles - in the long run - you can lose or win in either arena.
Readers, which do you think is the safer bet? Do you think you don't need no stinkin' IPO? Or, are you willing to wait it out for Facebook, Twitter and LinkedIn's IPOs to hit Wall Street?