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Investors take notice of social media's growth

For every powerhouse like Google, there are dozens of Internet companies that flop. Still, a decade after the dot-com bubble that burst, there is no shortage of investors trying to get a piece of the next online blockbuster.

Lately, much of the hype has centered on social media.

While many of the big names -- Facebook, LinkedIn and Twitter -- may sell stock publicly through IPOs one day, they have been raising capital by selling stakes to institutional investors, venture capitalists and wealthy investors. Mom-and-pop investors -- and users of social media -- also are angling for ways to invest in these private companies.

Earlier this month, California investment company NeXt BDC Capital Corp. started a closed-end mutual fund to buy shares in fast-growing private tech startups, which could include Facebook and other social media. That would give the public, who can buy closed-end shares that are traded like stocks, a chance to get in on the action.

And some mutual funds are reporting stakes in social media, though those investments are often only a fraction of a fund's portfolio. Baltimore's T. Rowe Price Group was one of several companies reportedly in talks to buy stakes in online deal site Groupon. T. Rowe 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.

But while early investing can mean the potential payoff is greater, so are the risks.

"The question for investors is: When you look at some of the private companies out there, are they the next Google or not?" said Jordan Rohan, an analyst at Stifel Nicolaus. "There's no easy answer to that."

With little public information about the financial performance of social media, it's difficult to put a value on these private companies and many other tech startups, analysts said. And questions remain about whether the hot startups can turn a profit and sustain it.

"One of the major issues -- this goes back to the dot-com crisis and the bubble effect -- is everything is based on an estimation," said Roger Staiger, an adjunct professor of finance at Johns Hopkins University's Carey School of Business.