5 reasons NOT to invest in the RenRen IPO

“The Facebook of China” is probably too tempting of a stock to pass up, but there are still warning signs that warrant acknowledgment before you invest in RenRen’s IPO.

Let me preface this by saying I’ve drank the RenRen Kool-Aid. How could any self-respecting geek turn down the opportunity to invest in the first major U.S. IPO for a social networking stock – especially one that’s being dubbed “the Facebook of China”? Still, there are warning signs that warrant being pointed out (even if you ultimately decide to ignore them in what will probably be a feeding frenzy on IPO day):

1) Competition. As it stands now, Facebook.com is blocked by the Chinese government. Rumors are running rampant that a partnership with Baidu.com, Inc. (NASDAQ:BIDU) – China’s largest search engine – is imminent, though. That could be bad news for RenRen. Who needs a Facebook clone, after all, when you can get the real thing? That said, I’m still not sure Facebook’s willing to turn information on its users over to the Chinese government – particularly if those users end up “disappearing” a few days later. Even if Facebook does decide to move ahead, it won’t happen overnight.

2) How many users do we have? One of the more puzzling pieces of the RenRen IPO is trying to figure out how many people use the site. RenRen itself can’t seem to spit out an accurate number. On April 15, the company claimed monthly uniques grew 29 percent (up 7 million users) during Q1 2011, per the Daily Times. Then, on April 27, RenRen back-tracked saying that monthly uniques were actually up just 19 percent (or 5 million users) during Q1. Weird…

All told, RenRen claims to have 117 million activated users as of March 31, 2011. Sources outside the company including Beijing’s Analysys International had previously reported the site has as many as 160 million registered users. I guess estimates will have to suffice.

3) Accounting abnormalities. “Prior to this offering, we have been a private company with limited accounting personnel and other resources for addressing our internal control over financial reporting,” RenRen writes in its F-1 filing with the SEC. An independent review of the company’s accounting procedures turned up “one material weakness and one significant deficiency.” Namely, the company has “insufficient accounting personnel with appropriate U.S. GAAP knowledge,” no stated plan for investing cash surpluses, and poor management of “treasury functions.” That makes RenRen the sort of company that embezzlers and fraudsters love. And fraudsters aren’t in short supply in China (take, for example, the recent news that the CEO of China’s Puda Coal secretly sold the company and forgot to mention that fact to shareholders).

4) PengYou. Ultimately, RenRen’s biggest competitor might not be Facebook, but rather a homegrown rival in PengYou.com. Two weeks ago, analysts at Goldman Sachs went on the record proclaiming PengYou will “become the dominant social network in China by leveraging (Tencent’s) much larger QQ community and more developed platforms.” Although PengYou launched just five months ago, it’s already the 26th most-visited site in China (check out my post RenRen IPO’s biggest hurdle might be PengYou for more).

5) What are ethics? When RenRen first launched in 2005 as XiaoNei.com, the company labeled itself a “Mark Zuckerberg production.” Zuckerberg, the CEO of Facebook, had nothing to do with the site, of course, but that didn’t really matter to RenRen’s founders. They just made a copy of Facebook and pushed it live. RenRen has something of a reputation for stealing ideas. When Kaixin001.com launched a social networking site in China, RenRen copied it (all the way down to the color scheme) and launched the doppelganger on Kaixin.com. Kaixin001.com eventually won a lawsuit against RenRen, but you can still type in Kaixin.com and get re-directed to RenRen.com. Maybe nice guys do finish last, after all.

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