Joe Chen does not usually like to hear his company referred to as a Facebook clone. But when the chief executive of Renren, China’s largest social networking site, was marketing the group’s initial public offering in the US last week, it was clear the comparison could pay off.
According to bankers working on the deal, the New York event that kicked off the roadshow more closely resembled a wedding banquet than an investor lunch, with more than 360 people present and most in high spirits.
The strong interest stems from the fact that there is no major social media or social networking company open to public investment. With a Facebook IPO at least a year off, many investors are keen for a slice of “the Facebook of China”.
The offering is set to price on Tuesday in the US and begin trading on Wednesday. Highlighting the success of the pitch to market Renren as a Facebook proxy, the price range was raised on Friday from the initial $9-$11 to $12-$14 a share. That could increase the deal size to as much as $743m, from the $584m planned originally.
But while Renren started out as a Facebook copy, the two services now have more differences than they have in common. “Almost all internet services have to evolve to adapt to the Chinese market,” says Benjamin Joffe, chief executive of Plus Eight Star, an Asia-focused digital strategy consultancy.
While Facebook operates an open platform where external developers can launch services, Renren has so far allowed only 1,000 of more than 100,000 applications submitted by third parties. The company also has its own games.
The two companies’ monetisation models are also quite different. Facebook’s is much more mature. The company is expanding aggressively, with the recent rollout of a daily deals initiative, its courtship of advertising agencies and the increasing number of uses for credits, Facebook’s currency for virtual goods from which it takes a 30 per cent commission on each transaction.
Compared with Facebook, Renren’s model is in its infancy. Its ads are much less targeted because there is much less reliable data available in China. Advertising accounts for only 42 per cent of the Chinese company’s revenues, with most of the remainder coming from Renren’s own games.
Renren’s lag in monetisation could be a weakness, says Sumeet Jain, a partner with the venture capital firm CMEA Capital in San Francisco. But if ultimately modelled on Facebook’s success, it could be an opportunity.
“Looking at Renren, you see a company that’s in a huge market that still has lots of room to grow,” says Mr Jain. “So it’s almost akin to saying, ‘If you could invest in Facebook one year ago, would you have?’ Most would say ‘Yes’.”
Revenue shares for third parties on Renren are also much lower than on Facebook. “Renren seems to be welcoming applications mostly to avoid having users visit other platforms for content they might be missing,” says Mr Joffe.
Renren is right to be stingy. While Facebook is mostly unrivalled in the US, there is a lot of competition in the Chinese market. Tencent, which operates the world’s largest instant messaging service, is a strong contender for building China’s largest social network, as are the country’s booming Twitter clones, or microblogs.
Renren also has a long way to go to match Facebook in size. Although it operates in the world’s most populous internet market with an online population of more than 450m, the company had no more than 31m monthly active users, and its revenue was just $77m last year. Facebook has been accorded a valuation of $75bn on private markets.
Done right, the main attraction for US investors is the potential growth among those 450m Chinese users – something that has so far evaded Facebook, which is blocked in China and has yet to find a way into that market.
But the context of operating in China also makes investors wary, according to Mr Jain.
“You’re already thinking about the risk of investing in China with the overarching government and regulatory bodies, and the exposure you have to not having full transparency of the business.”
The revision to certain parts of Renren’s prospectus last week raised the spectre of risk. But that does not appear to have taken off much of the shine.
“This is a rare chance to buy into SNS, and in a particularly fast-growing market, too,” says one of the bankers working on the deal. “That makes it one of the most important deals of the decade.”