While I thoroughly enjoyed my time as a Wall Street analyst, compliance issues hampered my ability to blog on SecondShares. Now that I’m back angel investing, I look forward to sharing thoughts and analysis on the social and mobile companies I refer to as “Social Internet” companies. Just as the siloed internet companies disrupted the offline leaders (e.g. Amazon v Walmart), Social Internet companies that are BORN social, will disrupt incumbent firs internet leaders. I first outlined my thesis in the only real thought piece I wrote a year ago. I now update those thoughts in a deck “The Social Internet“. While the deck is meant to be given live (which I love doing, as it’s such a fun dynamic topic to discuss), a lot of value can be derived by reviewing the slides. Enjoy the deck, share it, and I look forward to future posts.
RENREN IPO 30 TIMES OVERSUBSCRIBED
On Wednesday May 4, China-based social networking company Renren IPO’d to raise almost $750 million. The IPO was priced at the high end of the range at $14 ($12 to $14), after the price range was revised 30% higher a week earlier due to high demand.
Renren’s net revenues were $76.5 million in 2010, up 64% from $46.7 million in 2009 and up from $13.8 million in 2008. Renren had a net loss in 2010 of $64.1 million, down from $70.1 million in 2009. The IPO valued Renren at $5.5 billion, or 67 times 2010 net revenues (Goldman Sachs-Facebook funding was priced at 25 times estimated 2010 revenues), and we estimate that the IPO pricing valued Renren between 20 to 25 times 2012 revenues.
The Renren book was 30 times oversubscribed, and even after the resignation of the head of the audit committee and revision of its unique user numbers leading up to the offering, the book held together with very few accounts dropping out. Based on the tremendous amount of demand, the allocations had to be limited to many accounts. We note that 3 to 4 times covered is typically considered a good deal and recent Chinese IPOs have been 10x covered
Money has poured into Chinese Internet companies as the country is currently adding 10 million Internet users every month to a current Internet user base of 457 million (still only 34% penetration). In addition to this massive user base, China’s online advertising market is growing rapidly with estimates that it will triple to almost $13 billion by 2014 (roughly 14% of the global online revenue estimate). In addition to the growing digital advertising opportunity, China’s social gaming market is thriving with an estimated gamer population in excess of 300 million, producing revenue of $4 billion (roughly double the U.S. market).
Figure 1: China’s Online Ad Market Expected to Triple by 2014
Source: Renren via Mashable
Figure 2: Chinese Second Internet Landscape — Chinese Internet Companies & Their U.S. Counterparts
News of a potential partnership between Facebook and Baidu surfaced this week.
Facebook is entering China at a time when China is adding 10 million Internet users every month to a current Internet user base of 457 million (still only 34% penetration). In addition to this massive user base, China’s online advertising market is growing rapidly with estimates that it will triple to almost $13 billion by 2014 (roughly 14% of the global online revenue estimate).
In addition to accessing incremental advertising revenue, this partnership will allow Facebook entrée into China’s thriving social gaming market. With an estimated gamer population in excess of 300 million, producing revenue of $4 billion, China’s social gaming marketplace is roughly double the U.S. market, and growing rapidly, with estimates of $8 billion in 2014.
Facebook is currently restricted by the Great Firewall of China. Users within China who want to access Facebook (or YouTube, or Twitter) must use a VPN or other proxy service to bypass the block. As we have written about previously, Zuckerberg wants global ubiquity for Facebook, which means working with the Chinese bureaucrats to provide the control required by the government. This is a very different tact from Google, whose political views take precedence over near-term business objectives.
As the largest search engine in China, with an estimated 84% search market share, Baidu is an attractive partner as Facebook will gain access to significant traffic through Baidu’s search site. We also note that Baidu has strong ties with the Chinese government. Domestic sites such as RenRen and Tencent’s Pengyou currently dominate China’s social network market. Also of note are the Twitters of China — Sina’s Weibo and Tencent’s Weibo both reach in excess of 100 million users a month. Baidu currently has services to compete in either the social network of micro-blogging space, so a partnership with Facebook is a tremendous coup for them as well.
While commentary in China about the Facebook-Baidu partnership has been positive, challenges remain. Most notably, Facebook-Baidu will need to localize its offering to effectively compete against entrenched competitors.
Raising Our Facebook Estimates To Reflect China Contribution
To account for incremental revenue coming from advertising and eCommerce in China, we are raising our revenue estimate for Facebook in 2015 by over $900 million or 4%, yielding an incremental $10 billion in value in our 2015 estimate.
The Financial Times reported an impending $500 million U.S> based IPO of Chinese social networking ginat Renren. With over 160 million users, Renren is “the Facebook of China.” According to statistics by CNNIC, China has over 450 million Internet users, and Internet penetration is only 34%. Renren has benefitted from being able to access this expansive market without having to worry about competition from blocked sites like Facebook or Twitter. Thus Renren can focus on competing with domestic sites like Tencent’s Qzone, 51.com, and white-collar oriented Kaixin001.
In addition to benefitting from market forces, Renren has succeeded by aggressively iterating its web experience. Renren has managed to offer the majority of Facebook features, and has developed some unique features along the way. Unlike on Facebook, Renren users can see who has viewed their profiles. As its user base has grown, Renren has seen advertising revenues more than double in each of the last two years.
Globally, Facebook easily maintains leadership, with nearly quadruple the user base, an inherently wealthier user base, and according to data from Alexa, users spend nearly twice the amount of time on Facebook as they do on Renren.