The Next Google(s)

Posted by Wayne on March 13, 2008 – 8:25 am

I was inspired to write today’s article based on a question I saw come up on TickerHound a couple of weeks ago:

chidog47 asked:  “How can someone invest in private companies such as Facebook?”

You can click here to read some of the answers.  But I wanted to go a bit deeper on this topic because it’s one that interests me and one that I think is going to become increasingly important in the world of finance and investing.

If you’ve picked up a financial publication over the last 6 months, then there’s no doubt you’ve seen names like “Facebook”, “Digg”, “LinkedIn”, and a slew of other companies you can’t seem to find stock symbols for. Reason being, NONE of these companies are publicly traded yet, but people are talking about them like they’re the next Google.

So you’re probably at the point where you’re asking one of two questions:

1. When will they STOP talking about this stuff?
2. How can I get involved?

If you’re asking the first question, it’s probably the wrong one to be asking.  And I’ll tell you why by answering the folks who are asking the second question.
First off, the three companies I just mentioned are privately held, so if you’re wondering how you can invest in some of them, the short answer is: you can’t.  But that doesn’t mean you can’t profit from the trend that’s been taking shape on the web for the last 4 years.

Ever since Rupert Murdoch and his News Corp. (NYSE: NWS) gobbled up MySpace.com for  $500 million, we’ve seen a non-stop series of start-ups and acquisitions in the “social media” space.  But let me take a step back and explain what “social media” is and why it’s so important.

From the beginning of markets, there have been 3 classes of people:

1. Sellers
2. Buyers
3. And Marketers

The Sellers and Buyers are a necessary component of any marketplace – people need goods to buy and producers of those goods need people to buy them.  Despite what anybody tells you, money truly does make the world go round.  But for what seems like FOREVER, we’ve had this 3rd class of market participants who try to help put the first 2 groups of people together but without every truly putting them in touch with one another.

Now when you think about it in these terms, it seems like “marketing”, in the “traditional” sense is a pretty silly task.  If marketing is all about putting people in touch with one another, then wouldn’t everybody be much better served by getting rid of the “marketing” part of the equation and just figuring out a better way to communicate with one another?

Well, that’s exactly what’s been happening on the web for the last decade.  Despite all the banner ads popping up everywhere, what you’re really seeing is the emergence of a hyper-efficient marketplace – a virtual marketplace where someone who makes dolls in China can sell them to a Christmas-gift-buying mother in Idaho.

Now, you’re probably saying to yourself, “Yeah, the internet is great, but just like the marketing in the offline world, there’s marketing in the online world as well.”  Instead of billboards we have banner ads, instead of flyers under our doors, we have SPAM in our inboxes, etc.

Well, you’re partially right – those forms of marketing have certainly been the norm for the first generation of the web, but like Bob Dylan said, “times they are a-changin’!”

What we’ve been witnessing on the web for the last few years has been a movement amongst companies to become more “social”.  What I mean by that is if traditional marketing was about saying to the consumer, “Here’s our product, now buy it!”, then social media marketing is about saying, “Here’s what we have, what do you think?  How can we make it better?  What would you like to pay for it?  Ok, here’s exactly what you want.”

That might be an idyllic view of the web right now, but we’re not far off the mark.  Let me use some of the sites I mentioned as an example.

Take Digg.com – before, when you wanted news, you could buy a paper or watch the nightly news on television and you’d get what they gave you.  Nothing more.  But on Digg, you can rely on the wisdom of millions of other readers/viewers to democratically vote on and select the most relevant, entertaining or important news stories out there.

So instead of being limited to the opinions of Fox News, you get unlimited access to the best news this world has to offer.

Now that’s social media at its finest – and that’s why you’re seeing small companies shoot up like weeds, and big companies either try to buy them or at least invest in them.

Case in point:  Microsoft’s $240 million investment in Facebook.com, which gave the company a $15 billion valuation and made its 23 year old founder, Mark Zuckerberg, the youngest billionaire on the Forbes 400 list.

So now back to the original question I’m trying to answer:

How can you get involved?

Well, unless you’re a very well connected, high-net worth investor, it’s going to be very difficult to invest in the next Facebook or MySpace, but here are a few public companies that are doing the right thing in the social media space.  They’re aggressively building out their own product lines and acquiring others in order to speed up the process.

I’ll also talk a little bit about some of the companies that might not be on the media’s radar just yet, but certainly could be in the coming years as this space continues to expand.

Google (NYSE: GOOG) – I’m sure you’re tired of hearing this name already, but the truth of the matter is Google is the company powering much of the social media revolution.  The company is helping some of the start-ups in this space generate quick and easy revenue through its advertising solution, AdWords.  Furthermore, Google is helping the consumer by making it easier to find content and products that they’re looking for through its ubiquitous search engine.  I’m a long term bull on Google, regardless of what its stock price has been doing lately.

News Corp. (NYSE: NWS) –  Mr. Murdoch hasn’t slowed down a bit since the summer of 2005 when News Corp. acquired MySpace.com, the current leader in the social networking space.  Now he’s in the process of integrating his latest company into the News Corp. family, Dow Jones (publisher of the Wall Street Journal).  So you can bet your bottom dollar he’ll be doing whatever he can to beef up the company’s web properties as well.

Microsoft (Nasdaq: MSFT)…(and Yahoo!?) – The software giant has been trying to make headway into the web for years but has yet to see the type of penetration Google has.  But that might change over the next few months if Microsoft has its way.  The Redmond, Washington, company recently made a multi-billion dollar bid for Yahoo!, which would make Microsoft the proud owner of the most highly-trafficked website in the world.  That won’t solve all of its problems however, so I’m not completely convinced that Yahoo! is the silver bullet for Microsoft’s stagnant stock price.

The Not-so-Public Companies

Some of the private companies you’ll want to keep your eye on over the next year are all part of the social media space, but are all taking a unique twist on the plain vanilla models we’ve been seeing.

In my opinion, the companies that will succeed in the coming years are those that:

1. Serve niche markets
2. Give consumers new ways to communicate
3. Create scalable solutions to big problems

So here are some of the companies I’d keep my eye on to be the “news makers”of 2008:

Twitter.com – Twitter is a “micro-blogging” service that has just EXPLODED in terms of popularity over the last year.  Instead of typing long articles or blog posts, people can now literally send a text message from their mobile phones to their twitter page which other people can then come and read.  Imagine getting stock trade alerts sent to your mobile phone by your broker while neither of you were in an office.

So anybody following my Twitter (http://twitter.com/waynemulligan) can see what I’m doing, thinking, or talking about at any given time of the day.

This is the future of citizen journalism, and I’ll bet you’ll either be a reader or writer on this site within the next 12 months.

MetroFunk.com – This site isn’t even open to the public yet, but I’m already hearing great things about it.  Instead of being a “free for all” social networking utility, Metrofunk is taking the “luxury” approach to social networking.  The site is open through an “invitation only” system, and is here to give taste-makers and trendsetters a platform to showcase their content, goods, and services to a more focused audience.

While I haven’t gotten access to the site yet, and therefore can’t attest to the “greatness” (or lack thereof) of the service, it certainly sounds good in theory, and all the press coverage as of late certainly speaks to that.

You can visit the site at MetroFunk.com or read more about it, and how to score an invitation, by clicking here.

Etsy.com – Now this site is my personal pick for being 2008’s biggest runaway success story.  In my opinion, Etsy.com is going to be the next eBay (and more likely than not, will outpace the electronic auction company at some point in the not-so-distant future).  Most people would tell you that Etsy is just a simple craft site – a place for people to sell their homemade goods that didn’t have a big following on eBay.

But Etsy is much, much more than that.

By focusing on the crafts market and building out a universal payment system (coming this year), Etsy is positioning itself to become the main hub of global micro-commerce businesses.

Everybody from the World Bank on down has been trying help impoverished countries establish homegrown industries and sell their products abroad.  However, doing so without any sophisticated commerce, manufacturing or distribution networks has made that a most daunting task.  Etsy is taking care of a HUGE portion of that equation which is why I’m extremely optimistic about this company’s future.

So keep your eyes peeled in 2008 – exciting things will continue to happen on the “social” web and that will only mean good things for intelligent companies, consumers and investors.