Will Social Networks Stop Taking Outside Capital?

Several media outlets reported that a venture division of JPMorgan (NYSE: JPM) would invest $450 million in Twitter. The investment would have given Twitter a value of $4.5 billion. The reports were completely wrong.

Twitter founder Biz Stone said his company had no plans to accept an investment or  start the process toward an IPO.

The Twitter “news” not only shows that the media can botch a story. It also shows that social media companies like Twitter may be entering a new stage in which they will reject investments because they do not need them. Investment capital dilutes the holdings of current owners. These owners have begun to resist that dilution particularly when the firms in which they have a stake are profitable.

Industry analysts say that Twitter, Groupon, and Facebook are profitable. New IPO documents for LinkedIn show that it makes money as well. All of these companies are growing at an astonishing rate and none of the current growth depends on access to capital. It is, rather, a by-product of a tremendous interest in their services.

There was a concern up until recently that social networks could not make money. They were, according to experts, bad places to advertise because they could not target discrete groups of people the way that portals and large news and entertainment sites could. It turns out that companies like Facebook do have ways to help marketers reach the people they want to. That has caused concern about user privacy, but it may be the cost users have to pay to participate in free services.

Twitter, which did not seem to have any revenue model at all, has found that marketers believe it is a good place to enhance their brands and an excellent venue to reach local consumers for e-commerce purposes. Twitter has close to 200 million members. That is not a reach that newspapers, radio, or broadcast TV can match.

Social networks have entered a new stage. Their business plans have been proven. Profit and growth have become the focus of companies like Twitter. Gathering money from investors no longer holds any value. Social networks have come of age, at least in so far as they are real businesses.

Douglas A. McIntyre