FRANCISCO — Snapchat is not even 3 years old. It’s
run by a couple of 20-somethings with no prior business
experience. And it has never made a cent.
investors are fighting for the opportunity to throw
hundreds of millions at the mobile messaging service
that is all the rage with teens.
tiny Venice Beach, Calif., startup just turned down a $3
billion all-cash offer from Facebook Inc. And then,
according to the Silicon Valley rumor mill, it rejected
an offer from Google Inc., this one for $4 billion.
a big pot of cash for a smartphone application that
could vanish almost as quickly as the messages people
send on it.
Inc. is just one of several young tech startups with no
revenues and no profits that are commanding valuations
that rival those of long-established companies such as
Domino’s Pizza Inc., JetBlue Airways Corp. and Sotheby’s.
the better-known Silicon Valley companies with
monster-truck-sized valuations are mobile payments
startup Square Inc. at $3.25 billion, online storage
startup Dropbox Inc. at $4 billion, private
transportation service Uber Technologies Inc. at $3.5
billion and home rental service Airbnb Inc. at $2.5
sky-high valuations for companies with untested business
models are giving some people a bad case of dot-com deja
tech industry may not be in another bubble, said Aswath
Damodaran, professor of finance at the Stern School of
Business at New York University, referring to the rapid
rise and fall of Internet companies in the late 1990s
and early 2000s. But these paper valuations are a
"form of delusion," he said.
is pushing up the price tags? The ability of these
companies to draw a fast-growing following of young
users, analysts say.
giants are willing to spend large sums of money buying
these startups to keep up with young people’s rapidly
evolving online habits. And investors are looking to
place early bets on what could turn out to be the next
Facebook or Twitter Inc.
Pinterest Inc., whose service people use to post images
of their favorite things — outfits, home design,
recipes, vacation spots — to share with friends.
San Francisco company just raised $225 million from
investors, valuing it at $3.8 billion — up from $2.5
billion in February.
many other startups, Pinterest has tens of millions of
users, some of whom spend hours a day on the service,
yet it has just begun to explore how it will make money,
which means it could be years before it turns a profit.
although valuations in Silicon Valley are clearly
inflated, they may not be as bubbly as they sound, some
is just the latest social media company to show it can
make money from its massive audience. And its successful
initial public offering — it ended its first day of
trading with a $25 billion market cap despite never
having turned a profit — has whetted investors’
appetite for companies with significant growth
to the current fervor: Investors are feeling more
optimistic, with the Dow Jones industrial average and
Standard & Poor’s 500 indexes rising to record
interest rates low and big companies not growing much,
investors are more willing to take risks in the hunt for
bigger returns. A federal law enacted last year that
will allow startups to raise money from smaller
investors could send tech valuations even higher.
target: social media. With the success of Facebook,
LinkedIn Corp. and now Twitter, the sector has proved it
is not a passing fad.
not every social media company that has clinched a
multibillion-dollar valuation will prosper, Damodaran
like the guy who sells the Brooklyn Bridge to eight
people when he doesn’t own the bridge. It’s the same
story being told over and over again. And that worries
me," Damodaran said. "They can’t all be
decision to turn down billions of dollars drove people
to rant on social media this week after the Wall Street
Journal first reported the Snapchat news. Tweeted
novelist Kurt Andersen: "I’ll bet anyone $3 that
Snapchat is worth less than $3 billion 3 years from
captured the fancy of young people with a self-destruct
feature that makes messages — called "snaps"
— disappear seconds after they are viewed.
months ago, investors handed Snapchat about $13 million
and estimated its paper worth at about $70 million.
June, the company raised $60 million and its valuation
jumped to $800 million. Last month, Kara Swisher of
technology blog All Things D reported that Snapchat
might raise $200 million at a valuation of $4 billion.
Evan Spiegel, 23, and Bobby Murphy, 25, two former
Stanford fraternity brothers, are taking the position
that their startup is worth billions more.
previously nixed a $1 billion offer from Facebook,
Snapchat belongs to an exclusive club of white-hot
startups that have rejected mammoth offers in
high-stakes gambles, hoping to become
multibillion-dollar companies in their own right.
of those bets haven’t paid off. Take daily deals
service Groupon Inc., which foundered after rejecting
Google’s nearly $6 billion bid in 2010 before its IPO,
or social media pioneer Digg, which once fetched a heady
valuation of more than $160 million, only to sell for
about $500,000 last year.
is one of the lucky companies to spurn suitors and come
out on top. It turned down a $1 billion buyout offer
from Yahoo Inc. and one for $15 billion from Microsoft
Corp. Today it has a market cap of $120 billion.
for every Facebook, there are plenty of Myspaces. Very
few startups grow up to be huge successes.
now Facebook is on the prowl for those companies that
have gained the rapt attention of young people and pose
a threat to its own online hegemony.
April 2012, Facebook made its biggest acquisition with a
cash-and-stock deal initially valued at about $1 billion
for Instagram. Instagram soared in popularity by giving
young people a fun way to share photos on mobile
May, Yahoo borrowed a page from Facebook and paid $1.1
billion to buy blogging service Tumblr, a 6-year-old
company with more than 100 million users but little
revenue. Tumblr is popular with young people, in sharp
contrast to Yahoo’s older user base.
powerful momentum of these young companies
"threatens the incumbents very quickly," said
Internet veteran Jonathan Miller, an investment partner
with Advancit Capital.
used to take three years can now take a half a year
because the adoption is so fast," he said.
Snapchat, investors are enamored by the numbers. Nine
percent of U.S. smartphone users are on Snapchat,
according to a Pew Research Center study released last
month. Some 350 million "snaps" are shared
each day on Snapchat, up from 200 million in June.
Facebook Chief Executive Mark Zuckerberg first met and
was rebuffed by Snapchat, Facebook released a Snapchat
rival called Poke.
the TechCrunch Disrupt conference in September, Snapchat’s
Spiegel called the Poke app "the greatest Christmas
present we ever got."
never took off — a big problem for Facebook, which is
chasing young users. Facebook Chief Financial Officer
David Ebersman told analysts last month that the social
media giant had seen a decrease in daily users,
specifically among younger teens. Facebook has a large
war chest to deal with that problem: $9.3 billion in
cash and investments.
the clock may be ticking on Snapchat. For all its early
success, its founders may end up regretting not taking
the money, said David Wessels, a finance professor at
the University of Pennsylvania’s Wharton School.
see one CEO after another come through the Wharton
school and say, ‘I wish I had taken the money when I
had the chance,’ " Wessels said. "Never take
the money for granted. It won’t always be there