5 Reasons Why Social Media Investment is Risky

Since the onset of the Internet, dot-com businesses have tempted investment options. During the 90s we saw how a huge investment bubble made it difficult to determine what would be successful and what would flop. With huge hits like “Google,” these risky investments are still attractive to many investors. This is particularly true of social media, but the risks are still a major concern.

Social Media is Difficult to Value

To begin with, there was little information about how social media would perform. That’s changing as social media has gone public, but it doesn’t alter the fact that it’s difficult to place a value on these companies – just like any other tech start-up. It’s still difficult to tell if what appears a hot start-up company can turn a sustainable profit. Without reliable performance numbers, establishing a reliable value for these companies is not just difficult, but a risk in itself.

Estimation Based Value

The Market

Image via Flickr by Iman Mosaad
The dot-com bubble effect of the 90s hasn’t completely disappeared. It has merely shifted to a different variety of technology: social media. We see the same major issue where investment value is based on estimation. This has been discussed at the John Hopkins University Carey School of Business. Instead of being based on real cash projections, people rely on estimations, which heighten the level of risk when deciding where to invest.

Social Media’s Swift Changes

We’ve seen companies out of nowhere to become huge powerhouses. Anything that seems a brilliant concept is quickly bought for millions of dollars by larger corporations in the hopes of making huge profits. The problem lies social media fluidity. Some rise to surprising heights, while others are overshadowed by the next best social media concept.

Trends in technology and consumer demands have a tendency to change at rapid speed. Without professional assistance or a review of Fisher Investments it’s almost impossible to accurately gauge how to invest in these companies.

Difficulty in Social Media Dominance

Consider MySpace. It was the dominant social network for years and was quickly purchased by News Corp. for almost $600 million. But we all know how Facebook has relegated MySpace to relative insignificance. MySpace has since laid-off more than half of its work force and, more recently, shifted its focus to completely music.  Maintaining a social media’s dominance is difficult to predict, plan on, and achieve.

Fear of No-Name Startups

The bubble of the 90s dot-com boom taught investors that pumping up the stocks of tech companies, based on perceived potential, was too risky. Therefore venture capitalists are only considering recognizable names for their millions of investable funds.

So now, only the truly wealthy can buy private stocks in these big names, like Facebook and Twitter. They’re traded on secondary exchanges that require an income of a million dollars or more to trade.

Where there’s great risk there’s also the opportunity for large gains. This is true where social media is concerned, so before investing be certain you are ready to face the risks, both financially and emotionally.

 

Dylan Adams

Dylan Adams is a graduate of the University of South Florida. He completed his degree in Marketing and International Business. He loves NBA basketball and enjoying the Florida sun whenever he has the opportunity.