Snapchat Facebook Snub Looks Smart as Alibaba Mulls Stake

Take that, Facebook Inc. A year after rebuffing a $3 billion takeover proposal from Mark Zuckerberg, Snapchat Inc. is in talks to raise money from Alibaba Group Holding Ltd., people with knowledge of the matter said.

The valuation being considered is about $10 billion, more than three times what Facebook Chief Executive Officer Zuckerberg was willing to pay, said the people, who asked not to be identified because the talks are private.

The extra billions would make Evan Spiegel -- the 24-year-old frat boy-turned-CEO who founded Snapchat when he wasn’t organizing keg parties at Stanford -- look prescient, assuming the details get worked out. As with all deals, the funding discussions with Alibaba and others could still come unraveled.

Snapchat isn’t the only party poised to benefit. Alibaba would also get a bigger stake in disappearing-message technology that’s all the rage among teens while gaining a wider toehold in the U.S. -- more than 700 million disappearing “snaps” are sent per day -- where it’s planning an initial public offering in the coming months.

Snapchat’s mobile application enables users to send photos and messages to one another that typically vanish within seconds of being read.

Fanatics, Quixey

Alibaba has already shown a penchant for expanding in the U.S. by investing in promising startups, including the Lyft Inc. ride-sharing service. There’s a good chance other investments will follow. The talks with Snapchat are happening through Alibaba’s U.S.-based investment arm, set up last October to focus on “Internet commerce and emerging technologies.”

What Alibaba calls an “investment organization” is being headed by Michael Zeisser, who previously led Liberty Media Corp.’s efforts to go big in digital media and e-commerce. Before that, Zeisser worked in McKinsey & Co.’s media and private-equity practices.

Other buzzy startups backed by Alibaba include Fanatics Inc., an online seller of licensed sports gear; ShopRunner Inc., which provides free two-day shipping to online shoppers; and Quixey Inc., which is trying to become the Google Inc. of mobile applications by creating a tool that helps people find what they need in all those apps lurking on smartphones.

The investment also validates the Los Angeles startup scene after Facebook recently completed the $2 billion purchase of virtual-reality goggles maker Oculus VR Inc., which is based in Irvine, California.

Valuation Deserved?

“It would be great for a Los Angeles-based tech company to really build a meaningful business and Snapchat continues to prove that they’re willing to and have the technical ability to do it,” said Dana Settle, founding partner of venture capital firm Greycroft Partners LLC in Los Angeles.

Whether Snapchat deserves a $10 billion valuation is still up for debate. The company is in the early stages of building its business and makes little to no revenue. What it does have is an increasing user base -- while Snapchat handled 200 million “snaps” daily as of November, that had jumped to 700 million by May.

Even more important, many of Snapchat’s users are teens and young people, who Web companies are desperate to attract as they adopt new technology quickly. The startup is also playing in the field of digital messaging, which is changing rapidly as companies like WhatsApp Inc. and others disrupt how people communicate.

(An earlier version of this story was corrected because Snapchat CEO Evan Spiegel’s last name was misspelled.)

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