The mainstream banking industry may have entered a new phase: investing in large social media companies. For several years, these firms have been the target of venture capital investments -- and now it looks like banks may want a piece of the action.
JPMorgan Chase (JPM) plans to put $450 million into Twitter to buy a 10% stake, according to several media reports. The investment will be made through JPMorgan's Digital Growth Fund, which was only recently formed and has raised over $1 billion. Goldman Sachs (GS) made a $1.5 billion investment in Facebook last month.
The JPMorgan move is part of a trend to address a general concern by banks that they are late to the party to invest in Web 2.0 companies, particularly social networks and e-commerce firms. The hard fact the banks must face is that their investments are in later stages of these online companies' developments, so they are forced to pay higher premiums.
The conventional wisdom, born from the Internet boom and bust in the late 1990s and into 2000 and 2001, is that a similar bubble is well underway. If so, banks could find that their investments are worth nothing in a year or two. But if Facebook and its brethren are the next Googles (GOOG), there will be plenty of returns to go around.