Venture capital firm Kleiner Perkins Caufield & Byers plans to invest up to $20 million in Snapchat, valuing it at a hefty $10 billion, according to The Wall Street Journal. The deal would give Kleiner Perkins a less than 1 percent stake in Snapchat, the newspaper reported. That follows a round of funding earlier this year by Russian investment group DST Global that valued Snapchat at $7 billion.
Snapchat, it's worth noting, reportedly generates little in revenue and has yet to turn a profit. The company, founded only in early 2011, had previously raised $163 million over five rounds of investment, according to CrunchBase, a compilation of information on startups, including investments. In its last publicly announced investment round, Snapchat raised $50 million in December.
Snapchat did not immediately respond to a request for comment.
A company spokesperson downplayed the company's outsized valuation and capital needs, telling the Journal that they represent the "least exciting aspects" of the company. But the valuation is of great interest to the tech industry, and on Wall Street, where banks can make big bucks by taking prominent startups public.
For some, the high worth that blue-chip investors are putting on Snapchat recall the frothy dot-com era, when money-losing companies with only the vaguest of business models were quickly ushered into the public market. At the time, the conventional wisdom was that the fundamental nature of business had changed -- old metrics like profit and loss were out, "eyeballs" were in, as Internet companies raced to grow their audience as quickly as possible.
Indeed, the idea that the market can place an enormous value on a company that has yet to earn a dime is not new. Some businesses require a large number of customers or users to be viable. Take FedEx (FDX). The company operated in the red for year as it built out its logistical infrastructure and people became accustomed to overnight delivery. But it took having operations in enough cities for the service to become viable and sustainable.
Similarly, investors often assume that Internet companies that attract a large enough audience will eventually find ways to make money.
That approach has worked in some cases. Although Twitter (TWTR) isn't yet profitable, for instance, it had generated a significant revenue stream before its 2013 IPO, and it continues to grow financially.
The challenge? Shifting from a corporate culture where revenue is low down the priority list to one where making a profit is central. For many young Internet companies, negotiating that transition is even tougher today than it was when the first generation of online players emerged. That's largely because of the steady decline in what Internet firms can charge for advertising, as rates continue to fall.
Snapchat reportedly is already exploring ways of making revenue, including a feature introduced last month that would provide corporate-sponsored image additions called geofilters that users could superimpose over their messages.