Snapchat could become latest start-up to reach a $10-billion valuation


Last year, Snapchat decided Facebook’s $3-billion offer wasn’t cool. You know what’s cool? $10 billion.

The Venice Beach start-up, whose app enables users to send photos and videos that disappear seconds after they’re viewed, is reportedly in talks with investors including Chinese e-commerce behemoth Alibaba Group Holding for a funding round that would value the company at $10 billion.

The discussions are ongoing and terms could change, according to a Bloomberg report, which cited unnamed sources with knowledge of the situation.


If a deal happens, it would be vindication for Snapchat, which spurned hefty takeover offers from Facebook and Google to the bewilderment of tech watchers. Google reportedly bid $4 billion for the mobile messaging app.

Snapchat executives insisted then that they were in it for the long run, not to sell out and turn over the reins.

Snapchat would be the latest tech start-up to net a sky-high 11-figure valuation despite little to show on the financial side: Although users now send more than 700 million “snaps” a day, Snapchat has little to no revenue and no profit.

Still, a $10-billion valuation for Snapchat “is consistent with where the market is today,” said TX Zhuo, managing partner at Karlin Ventures in Los Angeles.

“With Alibaba’s investment, I think the valuation is well-justified,” he said. “You’d get a lot of reach having Alibaba as a strategic investor and I think the reach that they have — that’s where the monetization value is.” Monetization is analyst jargon for revenue.

Airbnb, Dropbox, Uber and the Chinese smartphone and apps maker Xiaomi are the only private, venture-backed start-ups to have reached the $10-billion threshold, according to data from CB Insights.


But in a red-hot market for tech start-ups, a slew of young companies has drawn intense interest from investors this year.

The largest bonanza for start-ups since the late 1990s reflects diminishing concern from investors about the ability of companies to quickly extract profit from revenue. They say they would rather see the businesses aggressively amass a huge number of users and become staples of everyday life, with the idea that advertising or other revenue will follow.

Ride-booking app Uber last month drew a mammoth funding injection of $1.2 billion at a valuation of $18 billion. Its rival Lyft raised $250 million in the spring, including from Alibaba.

Earlier this year, short-term home rental service Airbnb Inc. raised about $450 million to reach a value of $10 billion, and the file-sharing service Dropbox Inc. accepted $350 million to also reach the $10-billion mark. Pinterest Inc., an online bulletin board for images, was valued at $5 billion after receiving a $200-million investment this spring.

For its part, Snapchat Chief Executive Evan Spiegel has insisted that the company has a long revenue-building road map ahead of it that includes plans for in-app purchases and advertising.

Spiegel and Snapchat spokeswoman Mary Ritti did not return requests for comment Wednesday. A spokesman for Alibaba declined to comment.


Since its founding in 2011, Snapchat has raised $133 million from investors that include Benchmark Capital, Coatue Management, Lightspeed Venture Partners and Institutional Venture Partners.

Last summer, after IVP participated in a financing round that valued Snapchat at $800 million, general partner Dennis Phelps wrote in a blog post that the venture capital firm invested in Snapchat because of its “off the charts” growth and engagement metrics and its popularity among younger users.

Phelps also singled out Snapchat’s home in Los Angeles and said the start-up could be the biggest success story to come out of the local tech community in more than a decade. The L.A. start-up scene has been on an upswing recently, with Facebook announcing in March that it was buying virtual reality company Oculus for $2 billion and Walt Disney Co. buying multi-channel network Maker Studios for $500 million.

“Seldom have we seen a consumer application with this type of user momentum and excitement,” Phelps wrote. “Think Twitter. Think Instagram. Think Pinterest. And Snapchat is just getting started.”

Although they have to wait longer, hedge funds and private equity firms hope that later initial public offerings by companies able to incubate longer will produce better returns on their investments in a hot stock market.

The shifting emphasis during recent months is producing fewer investments in newer start-ups but more lucrative rounds of funding for more established ones, according to data released this month by research firm PitchBook. The median valuation of older start-ups has more than doubled during the last couple of years, surpassing $190 million so far in 2014, the firm said.


Lately, Alibaba has been busy scooping up majority and minority stakes in companies to bulk up its portfolio before going public sometime after Labor Day.

This year the Hangzhou-based group announced it would invest about $692 million in Chinese department store chain Intime Retail Group to grow its presence in the bricks-and-mortar space. It also led a $280-million round of financing for messaging app Tango. More recently it acquired mapping and navigation company AutoNavi.

Alibaba’s long-awaited initial public offering could be the biggest IPO ever. This month, in a regulatory filing, Alibaba said its valuation was $130 billion. Analysts estimate the company, which is bigger than Amazon and EBay combined, could raise $15 billion to $20 billion in its IPO.

Besides e-commerce, Alibaba has interests in banking, maps, cloud computing, music, and TV and film production.


Twitter: @byandreachang, @peard33