SAN FRANCISCO — Snapchat is not even 3 years old. It's run by a couple of twentysomethings with no prior business experience. And it has never made a cent.
Yet investors are fighting for the opportunity to throw hundreds of millions at the mobile messaging service that is all the rage with teens.
The tiny Venice Beach start-up just turned down a $3-billion all-cash offer from
That's a big pot of cash for a smartphone app that could vanish almost as quickly as the messages people send on it.
Snapchat Inc. is just one of several young tech start-ups with no revenues and no profits that are commanding valuations that rival those of long-established companies such as Domino's Pizza Inc.,
Among the better-known Silicon Valley companies with monster truck-sized valuations are mobile payments start-up Square Inc. at $3.25 billion, online storage start-up Dropbox Inc. at $4 billion, private transportation service Uber Technologies Inc. at $3.5 billion and home rental service Airbnb Inc. at $2.5 billion.
These sky-high valuations for companies with untested business models are giving some people a bad case of dot-com deja vu.
The tech industry may not be in another bubble, said Aswath Damodaran, professor of finance at the Stern School of Business at
What is pushing up the price tags? The ability of these companies to draw a fast-growing following of young users, analysts say.
Technology giants are willing to spend large sums of money buying these start-ups 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
Take Pinterest Inc., whose service people use to post images of their favorite things — outfits, home design, recipes, vacation spots — to share with friends.
The San Francisco company just raised $225 million from investors, valuing it at $3.8 billion — up from $2.5 billion in February.
Like many other start-ups, 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.
Still, although valuations in Silicon Valley are clearly inflated, they may not be as bubbly as they sound, some experts say.
Twitter 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 potential.
Contributing to the current fervor: Investors are feeling more optimistic, with the Dow Jones industrial average and Standard & Poor's 500 indexes rising to record highs.
With 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 start-ups to raise money from smaller investors could send tech valuations even higher.
Their target: social media. With the success of Facebook,
But not every social media company that has clinched a multibillion-dollar valuation will prosper, Damodaran said.
"It's like the guy who sells the
The hubris to turn down billions of dollars drove people to rant on social media this week after the
Snapchat captured the fancy of young people with a self-destruct feature that makes messages — called "snaps" — disappear seconds after they are viewed.
Eight months ago, investors handed Snapchat about $13 million and estimated its paper worth at about $70 million.
In 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.
But Evan Spiegel, 23, and Bobby Murphy, 25, two former Stanford fraternity brothers, are taking the position that their start-up is worth billions more.
Having previously nixed a $1-billion offer from Facebook, Snapchat belongs to an exclusive club of white-hot start-ups that have rejected mammoth offers in high-stakes gambles, hoping to become multibillion-dollar companies in their own right.
Many of those bets haven't paid off. Take daily deals service
Facebook is one of the lucky companies to spurn suitors and come out on top. It turned down a $1-billion buyout offer from
But for every Facebook, there are plenty of Myspaces. Very few start-ups grow up to be huge successes.
And 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.
In April 2012, Facebook made its biggest acquisition with a cash-and-stock deal initially valued at about $1 billion for
In May, Yahoo borrowed a page from Facebook and paid $1.1 billion to buy blogging service
The powerful momentum of these young companies "threatens the incumbents very quickly," said Internet veteran Jonathan Miller, an investment partner with Advancit Capital.
"What used to take three years can now take a half a year because the adoption is so fast," he said.
With 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.
After Facebook Chief Executive
At the TechCrunch Disrupt conference in September, Snapchat's Spiegel called the Poke app "the greatest Christmas present we ever got."
Poke 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.
But 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
"We 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 tomorrow."