RenRen IPO on the NYSE: the Nightmare of Chinese Social Networks or the Opportunity?

RenRen (http://www.renren.com), the China’s largest real-name social-networking site that dubbed “the Facebook of China”, raised US$743 million with its IPO on the New York Stock Exchange in May 4th, 2011. Its shares skyrocketed almost 71% up from the initial offering of $14.00 Wednesday to settle down at $18.00. With this, RenRen became the first IPO social networking site in the world, prior to Facebook.

http://www.pcworld.com/businesscenter/article/227347/wall_street_beat_china_tech_ipos_create_us_buzz.html

RenRen, which means “everyone ” in English, was launched in 2005, originally as a way for college student to connect. By entering the market far earlier than its local competitor, RenRen was able to amass a large following. Now, it has 31 million monthly unique users, less than a third of its total 117 million registered users.

Moreover, the actual Facebook has been blocked by Chinese Internet censors for almost two years now. Authorities in the country strictly regulate content on the Web, and often ban overseas sites with politically sensitive content like Twitter and YouTube. This has left China’s social networking market ripe for local players. Therefore, it seems that RenRen has been the leader of SNS platform in Chinese market.

However, is RenRen actually ready for IPO? What makes RenRen so anxious to go public? Just for the title of the first IPO social networking site in the world? You know, the “teacher” Facebook, which has more than 500 million active users, delayed its IPO repeatedly.

In fact, while RenRen’s growth over the last several years has been very impressive, its revenue fell sequentially in the two most recent quarters. And it only holds about 25% of China’s active user market for social networks. Moreover, even though RenRen is dubbed “Chinese Facebook”, in no way does it match the scale of Facebook. It just has the similar SNS appearance with Facebook but even has not clear operating model. Besides, RenRen is facing a lot strong competition from its competitors such as Tencent’s Pengyou, a similar website that launched this January and now has an 18.1 percent share of the social networking user market and Sina microblog, the “Twitter of China”, which had grown to over 100 million users in March.

http://www.pcworld.com/businesscenter/article/227052/chinas_facebook_renren_faces_stiff_competition.html

Since the time when RenRen IPO on the NYSE, it has arisen a great controversy in China and many analysts are interested in the true reason for RenRen’s IPO. Actually, no only RenRen, many Internet firms such as Youku.com, the “YouTube of China”, Dangdang.com, “the Amazon of China”, and Qihoo360 went public in the U.S. last year. It seems that once successful IPO, the missions of these Chinese Internet firms have completed. This narrow eyeshot and practice eager for quick success and instant benefit are very dangers. In contrast, Mark Zuckerberg hoping that Facebook can delay the company’s currency process because he not only for money interest, but hope to get financial and operational freedom.

But one thing is certainty, this IPO for RenRen is going to get them a lot of money. How RenRen uses this amount of money? Continue investing and get improvement and development? Or just want to raise money by going public to feather one’s nest? We have no idea now.

Meanwhile, an interesting phenomenon is that the U.S. market appears to have a big appetite for Chinese IPOs even though RenRen has not been the only company to have a brush with accounting issues. We admit that China is a big market that has about 457 million Internet users, but just because of this?

In short, if IPO is the tool for RenRen, even for most Chinese social networks firms, to circle money, coupled with American investors’ so-called “Chinese confidence”, it will be the nightmare of Chinese social networking and another bubble of Chinese Internet.

However, before the Bubble of the “Chinese Facebook” burst, RenRen still has time and opportunity to avoid this tragedy. It depends on how RenRen takes advantage of IPO to improve itself. All in all, the actual challenge has just started.

Additional Reading: http://techrice.com/2011/04/18/chinas-facebook-renren-to-ipo-soon-strengths-and-challenges/

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2 thoughts on “RenRen IPO on the NYSE: the Nightmare of Chinese Social Networks or the Opportunity?

  1. I think Wenyuan identifies several interesting themes in this post.

    There is clearly a social media element that needs to be examined given RenRen’s existing market dominance in China as the “Facebook” or social media backbone of the country. RenRen’s ability to attract users and build a social network under the strict guidelines and oversight of the Chinese government has allowed it to operate in a competitive bubble for some time. While other social media sites have begun to popup within the Chinese market, RenRen clearly boasts the largest market share, and thus is attractive to outside investors because of types of consumers it supports on the network, the penetration due to awareness that it provides, and most importantly, the type of user content/data that it sits on.

    Wenyuan’s comment about Mark Zuckerberg’s interests in controlling the financial direction and control of Facebook is an integral element of this discussion. Zuckerberg’s preferred position is to delay a public offering as long as possible because it allows him to run the company as he sees fit, not under the watchful eyes and control of shareholders. This does result in less capital liquidity for the company, but without the general public having insight into exactly HOW Facebook drives revenue, skepticism will remain as to the validity of social networks as sustainable businesses instead of just a communication portal with ancillary income streams (re. to what extend do social networking companies like Facebook and RenRen actually run at a profit?).

    Tying this back into RenRen and the issue around their IPO the Wenyuan discusses, there is clearly a benefit to companies such as RenRen, Youku.com, DangDang, etc., to go IPO because they can take advantage of market conditions and international investor appetite to obtain ownership of companies directly tied into what is perceived as the largest growth market in the world. Additionally, the benefit that these Chinese social media companies have over their American competitors is that the original idea was created, built, and proven viable in the American market (take Facebook, youtube.com, Twitter), only to have the American company either remain private, be acquired by a larger company (youtube.com acquired by Google). None of the proven American companies IPO’d, and as such, there is global investor appetite to take advantage of both a current business trend AND a hot global market.

    For RenRen, I would argue that there is still much to be seen as to the long-term sustainability of social networking sites as businesses. That said, RenRen management did make a good decision to take advantage of favorable market conditions to cash-in while they were at the top of their game. This could prove to be either a sound long-term growth decision in which they have increased their capital to better support future growth initiatives, or it could prove to be a savvy move to “feather the nest” of the largest shareholders.

    Either way, you can certainly bet that the Facebook’s of the world are watching what happens to RenRen very closely.

    • Great articles posted by Mr. Zhang. This subject social networking IPO’s and social networking valuation is constantly coming up in conversation and is very interesting to explore. The facts are there is no clear leading social networking website in China but there is plenty of competition with social networking applications from Tencent, Sina, Baidu, etc. Facebook has about 150mm users domestically in the US out of roughly 250mm whom have internet access. RenRen has about a tenth of China’s internet population (400mm) signed up for membership. In the future RenRen might be able to grow larger because of its adoption by the youth of China (college age and young adults) but they have not taken off in Chinese popular culture like facebook has in the US across all age segments. This young segment is the segment that spends money most freely in China as well as the US so from that vantage point RenRen has a lot of potential. The idea of RenRen being the official facebook of China has certainly been a case of buying the rumor and selling the fact. It is clearly not FACEBOOK. It doesn’t have Facebook’s reach; breath or depth of interact with its member users. Combing that information with the recent scrutiny concerning Chinese public start ups valuation….. This can explain its drop in share price.
      Facebook is not going to IPO to “cash out”. Mr. Zukerberg wants to grow the company as he sees fit and when Facebook is mature enough he will take it to market. The jury is still out if RenRen issued an IPO just so it partners could make a profit or they are trying to grow a sustainable business. I personally believe there is a race to go public as a social networking website before facebook issues an IPO because no carrier will be able to measure up to facebook. This is how I see RenRen. This company was not ready to go public clearly and its initial poor finances will be a drag on long term growth. Overall the information that these social networking website have of their users is the money making formula for them. There is not a cost of membership to RenRen or facebook for that matter. I am anxious to see the business model play out for these companies. Most social network user I know do not spend any money when they use the websites so until a majority does, there is only potential not tangible cash flow’s outside advertising.

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