Will Social Networks Stop Taking Outside Capital?

By Douglas A. McIntyre Updated Mar 4, 6:37AM EST · Published Mar 4, 5:16AM EST

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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

About the Author Douglas A. McIntyre →

Douglas A. McIntyre is the co-founder, chief executive officer and editor in chief of 24/7 Wall St. and 24/7 Tempo. He has held these jobs since 2006.

McIntyre has written thousands of articles for 24/7 Wall St. He is an expert on corporate finance, the automotive industry, media companies and international finance. He has edited articles on national demographics, sports, personal income and travel.

His work has been quoted or mentioned in The New York Times, The Wall Street Journal, Los Angeles Times, The Washington Post, NBC News, Time, The New Yorker, HuffPost USA Today, Business Insider, Yahoo, AOL, MarketWatch, The Atlantic, Bloomberg, New York Post, Chicago Tribune, Forbes, The Guardian and many other major publications. McIntyre has been a guest on CNBC, the BBC and television and radio stations across the country.

A magna cum laude graduate of Harvard College, McIntyre also was president of The Harvard Advocate. Founded in 1866, the Advocate is the oldest college publication in the United States.

TheStreet.com, Comps.com and Edgar Online are some of the public companies for which McIntyre served on the board of directors. He was a Vicinity Corporation board member when the company was sold to Microsoft in 2002. He served on the audit committees of some of these companies.

McIntyre has been the CEO of FutureSource, a provider of trading terminals and news to commodities and futures traders. He was president of Switchboard, the online phone directory company. He served as chairman and CEO of On2 Technologies, the video compression company that provided video compression software for Adobe’s Flash. Google bought On2 in 2009.