JPMorgan's First Target: Twitter
Flush with cash, JPMorgan's new Digital Growth Fund -- created to give private investors a stake in the burgeoning social media marketplace -- is angling for a minority stake in Twitter, which might value the site at $4.5 billion, according to the Financial Times. Negotiations are still in their preliminary stages, but a potential deal would value Twitter at roughly the value ($4.3 billion) suggested by trading in Twitter shares on SharesPost, a secondary market which first came to prominence with trading in private shares of Facebook.
Last week brought the first reports of JPMorgan's plans for investing in social media, backed by $1.2 billion raised from private investing clients -- roughly twice the original target funding level of $500-$700 million, reflecting the strong demand for social media investment opportunities.
Reporting about the fund stressed that the Digital Growth Fund will only invest in social media companies with proven business models -- but it's debatable where Twitter meets this criterion. Twitter execs claimed the microblogging service was profitable at the end of 2009 -- but then backed off this claim in August 2010. While the company doesn't report its financial results publicly, press reports have speculated that total revenues came to about $45 million in 2010 -- meaning the current valuations from SharesPost and JPMorgan are 100 times the company's revenues.
Even if these valuations stand up to investor scrutiny in the long term, JPMorgan must take care to avoid running afoul of the Securities and Exchange Commission, which recently forced Goldman Sachs into an embarrassing retreat when it tried to arrange investments in Facebook by private clients. The SEC (which looks askance on what it views as the emergence of a shadow stock market for private shares in social media companies) warned Goldman that its Facebook sales pitch to investment client might have violated regulations prohibiting public promotions of private investment opportunities. As a result, Goldman had to limit its investment offering to overseas private investment clients, to the chagrin of U.S. clients excited about social media investment opportunities.