Will social media market listings trigger a new dot-com bubble?

The Chinese Facebook-equivalent, Renren, will test appetites for social media listings with plans to float on the stockmarket.

The most popular social network in China, Renren.com could be valued at up to $500 million, should plans to list in the US be successful. This would also be the first float of a pure social media group to date, and is being watched closely ahead of an expected market introduction of Facebook.

Renren – Chinese for “everyone” – was founded in 2005 and has 22 million active users. Facebook is blocked in China, and while there are ways around this, Chinese usage is limited. $500 million is at the higher valuation end of most floats, but this still pales in comparison with the numbers tossed around for Facebook – now potentially worth a whopping $60 million.

Jam tomorrow
The reason this is problematic, however, is that much of the valuation is based on the promise of “jam tomorrow” – meaning that while the company doesn’t make much money right now, people expect it to deliver in the future. Take Twitter as an example – the company is losing money, but it is valued at $10 billion. This reflects the fact that we can tell the company is on to something that people like, meaning there is the potential for money to follow. But the numbers are still guesswork at this stage because no one really knows anything concrete about how Twitter, or other social media groups, will make any significant cash.

This is part of the reason why Facebook may be forced to list on the public markets earlier than founder Mark Zuckerberg strictly wants. Since Facebook raised $500 million this January, US trading authorities have started circling the group. The rules are that no company with more than 499 shareholders can stay private, and Facebook has gone above this number. It has got away with it so far by saying most of these shareholders are staff, but with the continuing hype, Uncle Sam is getting restless.

Investing in a private company like Facebook can be a good thing for investors, who can get more return on their money by getting in on the ground. But there is also significant risk, because reporting and accounting rules are a lot more relaxed for a private company. And with the increasingly dizzying valuation – the company is now estimated to be worth the same as supermarket giant Tesco – authorities may force Facebook to list in order to secure more certainty for shareholders. It was a similar situation that forced Google onto the market back in 2004, and Facebook may follow suit in May 2012.

Bubble 2.0?
The excitement around social network valuations has led to speculation we could be facing another dot-com bubble. Last time the bubble was driven by excitement about the internet and its life-changing implications; this time we’re getting whipped into a frenzy about the potential implications of social media.

“The first wave of internet firms gave us an explosion of information. Now we need filters – we need to trust where that information is coming from,” Sumon Sadhu of Silicon Valley consultancy Quid said to the Guardian. This is in essence what makes social networks so useful – they let us approach the seemingly infinite internet in a familiar setting, with information dripped through to us from friends and trusted sources.

The last bubble was only a decade ago, so memories are still fresh and should hopefully keep things from getting too much out of hand. Still, market history demonstrates that we do have a tendency to get carried away with new ideas. This is why it’s worth remembering it took ten years for the promises of the first dot-com bubble – the online world – to become reality; it’s only now that broadband is the norm for most people in the Western world. Ten years ago this likely outcome drove dot.com company valuations into the stratosphere, but even though the predictions turned out to be accurate, the desired results took far longer than expected and the bubble burst.

While it’s very possible social media will change the way we exchange information for good, we are far away from reaching this point on any grand scale yet. The area is still developing, and we still don’t even completely understand where it’s all going.