In part one of this series we looked at social media as a means of hedging your traditional advertising “bet”, using it as a tool to protect against potential losses brought about by unprofitable, outdated, traditional advertising methods. While it can certainly be used in a microenvironment like a small business’ marketing campaign, social can also act as a traditional hedge.
Sure investing in social startups, or in this case, launching your own, is far from a traditional investment vehicle, but it could very well be the safest investment you have ever made. Everybody has some “great” idea for a new website that will change the world and allow them to retire early somewhere on the Italian coast, and while the odds of you becoming the next Mark Zuckerberg are more than his net worth to one, that doesn’t mean you can’t generate a decent return on your money.
You’re a mid-level executive, you bring home $100,000 a year, of which you place 5% in an ultraconservative 401K, save 10% for a rainy day, and invest an additional 10% in traditional vehicles, stocks, bonds, mutual funds, etc. Using 2012 as an example, which in a reality was a phenomenal year for the market, we can assume that you made 13.4% (S&P 2012 gain) on your 10,000 investment, bringing home a pretax profit of $1,340.
While that 13% return is certainly nothing to scoff at, and most (smart) investors would take that every day of the week, there is some semblance of a risk taker in all of us, and sometimes that SPDR ETF just doesn’t cut it. Fortunately for you, you just got off the phone with your broker and Direxion just unveiled 3X leveraged ETFs! That’s the risk you were looking for, it has high earning potential and because it’s regulated by an American institution it retains some degree of safety, right?
Now, let’s pretend you invest half of your yearly $10,000 into the 3X leveraged ETF, day one rolls around and unfortunately the market opens down 1%. While normally that would not be such a big deal, that 1% is really a 3% hit for your leveraged fund. The bell rings, and at the end of the day you’re only down $150 which brings you to $4,850. No big deal, the next day comes around and the markets surges 1% on a good jobs report. But wait, a 1% gain only brings you to $4,995, you’re still down $5. Unfortunately for you, since your lost 3% on $5,000 day one, day two’s bump couldn’t get you back to par since you were working with a depleted capital supply. Although this happens daily with traditional investments, you’re not a day trader, and it takes very little time for your investment’s working capital to be exhausted.
However, this is 2013, you decide to hop on the social bandwagon and put that freshman level computer science class to the test. Instead of investing $5,000 into some volatile fund or note that is based on an index that was created by an overseas investment bank, you decide to leave $9,000 in traditional vehicles and invest the remaining $1,000 in your very own social startup. You go with something niche, in this case, Fiesta Campus (www.fiestacampus.com), a photo sharing website for college students. You register the domain for $12.99 on GoDaddy, use Wix or the like to design and host your website for and additional $9.99 a month and boom you’re up and running. Of course you have to make it legal and your business formation costs you an additional $250. From there, you begin to build a user base and generate some web traffic, and since your business model is based on advertising revenue, you can’t make money without them. You market on Twitter, Facebook, and the like but you decide to expedite the process and spend your remaining $600 on advertising space in a local college newspaper. Fortunately, their print advertising is very cheap and $600 gets you a front page ad in 10,000 papers. That being said, only 75% of those are read by college students, and of those, only 5%, a total of 375 people, go to your website and become users. A week later, the flux in web traffic causes the value of your $13 domain to skyrocket, it increases in value tenfold, and thanks to GoDaddy’s free valuation tool, you realize your domain is now worth $130.
So, 6 weeks after your website went live your domain’s value has skyrocketed, but your domain is not your most valuable asset, your 375 users are. When Facebook went public, they were given a total valuation of $101 billion and had 845 million users, giving each a value of $121. Since we cannot reasonably assume that after 6 weeks your users are as valuable as Facebook’s, we’ll say that they are worth only 10% of what theirs are, $12.10 a user. If we then multiply that out 375 times and add in the $121 domain valuation, your social startup, which only cost you a $1,000, is now worth $4,658.50, quite a hefty return for a 4 month period.
The good news for your aspiring entrepreneurs, it only gets better. As you gain more and more users, they actually increase in value, as does your domain. However, once you hit a certain threshold, gain a solid user base, and hit traffic benchmarks, advertisers will be knocking down your door to place their banner ads on the side of your website, that fortunately for your wallet, boasts a very specific group of users and allows for highly targeted advertising.
Finally, let’s look at the potential downside, remember, gone are the days where starting a business took countless hours and tens of thousands of dollars in capital. While launching a social startup is by no means easy, nor are there any dividends or guarantees, it does provide a high potential, low risk investment that cannot be mimicked by traditional vehicles. What’s the absolute worst case scenario? You lose $1,000, less the $12.99 domain which will only increase in value over the long term, as relevant domain names are become increasingly scarce as startups and speculators purchase thousands a day. So, when you’re analyzing potential investments, ask yourself, what do you have to lose? Can you afford to take a $1,000 risk and give up some free time? If so, its time you reallocate your risk into something far more profitable and launch your very own social startup.
While I was forced to make a lot of educated assumptions regarding returns, pricing, and costs, social’s potential as an alternative investment, or hedge on traditional vehicles, is undeniable.
Don’t forget to subscribe via email and follow me on Twitter: @BrendanBrandt
© 2012 Brendan Brandt. All Rights Reserved.
Additional Readings:
How Much Is Each Facebook User Worth? – http://thenextweb.com/socialmedia/2012/03/31/how-much-is-each-facebook-user-worth/
Stock Market Performance By The Numbers – http://www.wyattresearch.com/article/2012-stock-market-performance-by-the-numbers/29185
Top 5 Niche Social Networks – http://computer.howstuffworks.com/internet/social-networking/information/5-niche-social-networks.htm#page=0
Advertising Rates – http://www.cavalierdaily.com/page/advertising-rates
Brendan's Brainstorms 