Social media firms need to turn a profit if they want to cash in

IS THIS the end of the social media IPO? M&A advisory firm Magister Advisors says that weak showings from Facebook, Groupon and Zynga mean tech entrepreneurs looking for their big payday might be wise to sidestep listing and focus on getting bought up instead, like Skype, bought by eBay in 2005 for $4.1bn, and YouTube, bought by Google for $1.65bn in 2006.

Yet it’s not necessarily as clearcut as it sounds. The sale of YouTube made its founders Steve Chen, Chad Hurley and Jawed Karim into millionaires, and Skype’s founders did even more handsomely. But even the flawed IPO of Facebook was in another league. Its market cap remains north of $40bn. Zynga has lost 80 per cent of its value since its IPO and still clocks in above $2bn.

Likewise, if you care about your company, cashing out risks selling out. YouTube benefited from Google’s scale, but Skype languished in eBay’s hands. Twitter may yet see a fresh offer from Google of its own, but it would be better continuing its focus on how to turn a profit, not how to pass that problem on.