This week’s Big Deal analysis looks at how social networks look to translate their large user base into other profitable, cash-generative businesses.
Renren, a Chinese-language social network that floated in New York just ahead of US-based peer Facebook’s $38 per share initial public offering (IPO) in May, has turned to dramatic routes to find ways to leverage its business.
Last week, Renren said it had invested $49m of a $77.2m series B round for US-based Social Finance (SoFi), a US crowdsourcing platform for aumni to provide loans to students pilotted last year by Michael Cagney while he was studying for his Masters in Business Administration (MBA) at Stanford University.
Joseph Chen, executive chairman of Renren, graduated from Stanford’s School of Business with an MBA in 1999 and spoke at last year’s China 2.0: Transforming Media and Commerce conference at the university just as SoFi was starting its pilot.
Chen, who sits on SoFi’s board after backing the A round in April, said: “With gaming and e-commerce socialized, as exemplified by social gaming and social commerce, we expect the next wave will be finance and education; SoFi lies at the nexus of that revolution.”
The corporate venturing deal helps Renren reach outside it perceived strategic options as the company’s advertising revenue growth started declining in the first quarter compared to last year ahead of its IPO.
As bank Citigroup’s equity research analysts put it when they started covering Renren’s stock: ““Renren has a strategic dilemma.
“Positioned as ‘the Facebook of China’ at its IPO, and that space now clearly claimed by Tencent (and Sina) in a largely ‘winner-take-all’ environment, the company [Renren] must redefine its strategy to drive value.
“Its options, however, are limited with expansion into: (1) professional networking, (2) mobile, (3) games, or (4) group-buy, all fraught with challenges. Using SOTP [sum-of-the-parts] and valuing each division via benchmarking to comps [comparisons or competitors], we derive a fair value of US$2.94 with 22% downside from current levels [$3.70 during Wednesday, September 12].”
Moving into financial services opens up a very large business, which the wisdom of crowds and big data analytics can be applied to make more and hopefully better investment decisions at a lower cost.
It is a powerful model of disruption for the financial services industry and one that other corporate venturing units are tapping into.
Germany-based software provider SAP’s affiliated SAP Ventures unit reaped large rewards from backing business network LinkedIn (a potential buyer for SoFi one could imagine) and supported small business loans provider On Deck’s series C round last year. Last month, On Deck took on a further $97m in debt to support its burgeoning loans book, while in consumer lending similar groups, such as Funding Circle, Lending Club and Wonga, have raised venture funding from consortia including Union Square and Index Ventures.
But potentially the biggest disruption could come if Facebook makes a success of its Credits scheme that acts as a virtual currency and used in online games, and successfully targets more advertising using its real-time FBX exchange platform.
As Google found when it was able to link advertising to its word-search functions, understanding what people are doing in real-time and then offering this knowledge as a sales opportunity is very powerful. With Facebook homing in on mobile devices so it can use its Instagram purchase to connect location with people’s faces, FBX could also be applied in the physical world as stores can target special offers as you walk into a shop – with purchases by FB Credit if you want.
The challenge with all networks, however, remains the same – keeping people’s interest by helping them in work or occupy their leisure time.