Market Overview

Getting in on the Ground Floor of the Next Tumblr?


It was hard to miss the news two weeks ago of Yahoo (Nasdaq: YHOO) buying Tumblr at a purchase price of a cool $1.1 billion dollars.  Not a bad payday for a company that only produced $12 million in revenue last year.  This just demonstrates the explosive growth potential that many people project for the social media space in general in terms of several companies living up to what some currently consider lofty valuations. 

As an investor I look for opportunities like these.  Getting in on the ground floor of a company that could become a disruptor in a rapid growth industry where peers are being acquired based on metrics that are not necessarily currently quantifiable.  I think the social media space in general right now is the prime example of this.  While the sector has its share of naysayers who think other companies in the space, such as Facebook (Nasdaq: FB) and LinkedIn (NYSE: LNKD), are currently overvalued based on traditional metrics, there is  a reason many smart-money investors are placing the current valuations on them. 


From a risk/reward perspective I personally believe it is a little late to the game to start investing in these social media behemoths now.  The early investors already made their fortunes in them and now they are trading at valuations that have had time to develop in the public markets.  In the case of Tumblr, Yahoo made a smart move buying it before it went public and before the market had time to place a higher valuation on it.  It is fine to pay up for something to make sure you own it and before others have really had a chance to get involved in the bidding process.  Here is an example of fortunes that were made by the early investors in Tumblr:

· USV and Spark Capital each invested a total of $13 million, including $350,000 each in the company's original funding round. Then they each plugged in $2 million during each of Tumblr's next two rounds, before going the pro rata route on the Series D (led by Sequoia Capital) and Series E (Greylock/Insight) rounds.  Following Tumblr's $1.1 billion acquisition by Yahoo (YHOO), USV and Spark each received around $192 million in proceeds (i.e., a combined 35% stake).

 The billions made from more developed social networks Facebook and LinkedIn for early investors have been even better publicized.

There is a newcomer on the social media scene that seems to have several parallels to Tumblr in this regard.  Its platform is only beta and it still already has large following on its Facebook page and plenty of positive press regarding the product.  I think it will prove to be a complete game-changer for several reasons. 

What is the one thing limiting current social media platforms from complete immersion in our global environment?  The ability to connect in any language.  Yappn (OTCBB:YPPN) addresses this and could prove to provide the ultimate solution.  Experienced CEO David Lucatch has done it before with his Ortsbo’s beta launch, and Yappn looks to improve upon it.  Yappn provides a community where people can meet, chat, engage and consume content, regardless of which language they speak.  It completely breaks down this barrier to open up its social media platform on a truly international level.  It seems like some smart investors are just catching on to not only the massive growth potential for the platform itself, but also the growth potential for early investors in the marketplace.

This is a very speculative play of course, with inherent large risks.  To see a complete lists of risks as outlined by the company click here.   The largest risk in my mind is getting surpassed from a technological standpoint before it really takes off. Judging by the people behind this company and past successes, though, I think it mitigates this somewhat as they will have a first-mover advantage.  As always, do your own due diligence before investing. I think you will be intrigued by what you find in this particular case.

Disclosure: Long YPPN

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets Trading Ideas


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