Social Media Allocations and the Facebook IPO Trickle-Down Effect

By Erin Griffith , written on May 16, 2012

From The News Desk

A rising tide lifts all boats.

For social media, Facebook is that tide. And thanks to the madness surrounding the company's $100 billion IPO, it's going to lift a lot of boats.

Plenty of VCs invest in social media and have for years. But public market investors, the ones that'll be snapping up $12 billion worth of Facebook shares, have only begun to whet their social media appetites.

Which is to say, many mutual funds, hedge funds, and various other institutional investors now have a "social" allocation. They typically allot certain percentages of their portfolios to companies in specific sectors for the sake of diversity. The social allocation is notable because usually these things break down very broadly -- energy stocks, consumer products stocks, industrials, etc. But now, within a tech portfolio, things are getting more specific.

It's not unlike 1996, when fund managers began realizing that, within technology portfolios, "Internet" was an important category. Now Internet stocks dominate tech portfolios and there are plenty of Internet-focused funds specializing in the category. Similarly, I've heard of several social media-focused funds being formed to satisfy investor demand.

Thus far the allocations to social are extremely small, because we haven't exactly been drowning in opportunities. Startups are waiting longer to go public, so firms like T. Rowe Price and Fidelity have invested in hot social media companies while they're still private through the secondary market.

Not all funds have flexible enough terms to make those kinds of deals. Their large cap social options are limited to LinkedIn or international players Yandex, RenRen, and Quepasa. Smaller options include Jive Media, Zillow, and Yelp. As of Friday, they'll have Facebook.

Public social media companies have already seen Facebook enthusiasm buoy their stock prices. Upcoming social media IPOs will have no problem rounding up the funds.

Facebook will have a huge impact on social allocations, because the demand is going to far outstrip the supply. Valued at over $100 billion, Facebook will only offer $12 billion to investors. Tiny floats like this lead to giant pops in first-day trading -- look at LinkedIn, which only floated just $352.8 million at a total valuation of over $3 billion. First day trading ran the stock up 109 percent; the company's market cap now hovers over $11 billion.

When investors can't get into Facebook on day one, and then, when they can't get Facebook at a reasonable price, they can't just shrug and give up. They have to put the money in the social bucket to work somewhere, which means second and third tier social media companies will have to suffice.

Unfortunately, there aren't many of those in the pipeline. Glam Media, which has recently hired bankers for its IPO, could probably call itself social. LivingSocial, which has the word social in the name but really isn't very, could try for that angle perhaps The company will likely hold off on an IPO after it's $400 million round of funding last year. Most of the 2012's upcoming tech IPO's can't really call themselves social at all: Kayak, Workday, ExactTarget, CafePress, and Brightcove.

Fear not. Renaissance Capital optimistically counts Airbnb, Dropbox, LivingSocial, and Spotify among its "shadow" backlog of IPO candidates.