News Column

Is Snapchat Another Dotcom Deja Vu?

November 25, 2013

Jessica Guynn, Los Angeles Times (MCT)

Snapchat founders reportedly have turned down buyout offers for $4 billion

Snapchat is not even 3 years old. It's run by a couple of 20- somethings with no previous business experience. And it has never made a cent.

Yet investors are fighting for the opportunity to throw hundreds of millions of dollars at the mobile messaging service that is all the rage with teens.

The tiny Venice Beach, Calif., startup just turned down a $3 billion all-cash offer from Facebook. And, according to the Silicon Valley rumor mill, it rejected an offer from Google, this one for $4 billion.

That's a big pot of cash for a smartphone application that could vanish almost as quickly as the messages people send on it.

Snapchat has a self-destruct feature that makes messages - called "snaps" - disappear seconds after they are viewed.

It is one of several young tech startups with no revenue and no profits that are commanding valuations that rival those of long- established companies such as Domino's Pizza, JetBlue Airways and Sotheby's.

Among the better-known Silicon Valley companies with monster- truck-sized valuations are online storage startup Dropbox at $4 billion, private transportation service Uber Technologies at $3.5 billion, mobile payments startup Square at $3.25 billion and home rental service Airbnb at $2.5 billion.

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 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.

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 to keep up with youngsters' rapidly evolving online habits. And investors are looking to place early bets on what could turn out to be the next Facebook or Twitter.

Take Pinterest, 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 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.

Still, valuations in Silicon Valley might 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. 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 startups to raise money from smaller investors could send tech valuations even higher.

With the success of Facebook, LinkedIn and now Twitter, the social media sector has proved it is not a passing fad.

But not every social media company that clinches a multibillion- dollar valuation will prosper, Damodaran said.

"It's 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 winners."

Virginian - Pilot

(c) 2013 ProQuest Information and Learning Company; All Rights Reserved.

Original headline: dot-com deja vu?

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Source: (c) 2013 ProQuest Information and Learning Company; All Rights Reserved.

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