* Square aiming at $4 bln valuation, up from $1 bln
* Is Facebook IPO a turning point for other tech IPOs?
By Sarah McBride
SAN FRANCISCO, May 29 As Silicon Valley
scrambles to assess the impact of the Facebook IPO
mess, all eyes are on Square.
The much-heralded, next-generation payments company had been
aiming to raise its next round of venture capital funds at a
valuation of as much as $4 billion - up from $1 billion just a
year ago. That is the sort of acceleration in valuation that
happened with Facebook prior to its public market debut.
But with Facebook worth $30 billion less than it was just
two weeks ago, industry insiders say that concerns about
overexuberance around social media and other Internet companies
-- which began to emerge late last year -- have mounted.
"There's a chill settling in over the market," said one
late-stage venture capitalist. "Going back to reality is
helpful," he added.
The ability of Square, and a handful of other hot Internet
start-ups, including Asana, Just Fabulous and Ideeli, to raise
money at super-premium valuations is now shaping up as a test of
whether Facebook's IPO marks a turning point in the latest tech
Facebook's IPO was a success by one key metric - raising the
maximum possible amount of cash in public markets for the
company and early investors - but it was a massive failure for
later-stage investors and people who bought Facebook shares at
the IPO price of $38.
A number of high-profile start-ups had the luck or foresight
to raise money from venture capitalists just ahead of the
Facebook IPO. Question-and-answer service Quora, founded by
Facebook alumni, raised $50 million recently at a reported $400
million valuation, even though it has no revenue. Online
bulletin board Pinterest raised $100 million at a $1.5 billion
But those who did not get their deals done before the
Facebook offering could be in a tricky spot.
Workplace-collaboration network Asana has been talking to
venture capitalists about a new round of funding in the $20
million to $30 million range, two sources said. The new round
would value the company at around $250 million. Online retailers
JustFabulous and Ideeli are both seeking to raise $30 million
to$50 million at a $300 million to $500 million valuation,
according to another source who had talked to those companies
before the Facebook IPO.
The most visible of all is Square, a company run by Twitter
co-founder and Silicon Valley darling Jack Dorsey. Square aims
to reinvent the payment function with mobile devices and
sophisticated software and identity technologies.
Square announced a $100 million investment led by Kleiner
Perkins Caufield & Byers last June, valuing the company at $1
billion. Other backers include Sequoia Capital, Tiger Global
Management, and Visa. Venture capitalists say it is
seeking a $4 billion valuation for its next round. A Square
spokesman declined to comment.
Venture capitalists generally try to invest in companies
they think will be worth at least three to five times more than
their initial investment by the time the companies get acquired
or go public.
That means Square, to justify a $4 billion valuation, would
have to be worth at least $12 billion in a few years - a tall
order for a company operating in a business with slim margins,
deep-pocketed and established players, and lots of fraud.
Square's fans counter that it is growing quickly and has a
unique opportunity to leverage social-media platforms and upend
entrenched businesses that are short on innovation.
Asana might have an easier story to sell. It is run by
Facebook co-founder Dustin Moskovitz, and the steady monthly
revenue it gets from its best customers - a premium service
launched in April - could make it popular with investors looking
for reliability as well as growth.
Still, the advantage Asana was perceived to enjoy due to
enthusiasm around social networks in general and Facebook in
particular could now look more like a liability. A spokesman for
Asana declined to comment on financing.
JustFabulous and Ideeli may have a tougher time, some
venture capitalists say. JustFabulous co-Chief Executive Adam
Goldenberg said the company does not comment on financing. A
spokeswoman for Ideeli declined to comment.
Most e-commerce companies eventually are acquired at about
one to 1.5 times revenue, but in the early stages they ask for
valuations of five or 10 times revenue, venture capitalists say.
That means a company would have to increase revenue by a factor
of 15 for a venture capitalist to make three times its return.
Very high valuations can also create another problem in that
they limit the pool of potential acquirers. At a 10-figure
valuation, companies including Apple, Facebook, Google
or Microsoft are almost the only possible
buyers - an especially important issue if the IPO market as a
whole goes dormant for a time.
Asana last raised funds in 2009, when Andreessen Horowitz
and Benchmark Capital committed $10 million. JustFab raised $33
million last year, and Ideeli has raised a total of $70 million,
including $41 million last year.
"I think the valuations in the private market are high,"
said Mary Meeker, a former star Internet analyst and now a
partner at venture capital firm Kleiner Perkins Caufield &
Speaking at the "D" conference in Southern California, where
many Internet industry leaders gathered this week, she added:
"We run a billion-dollar digital growth fund at Kleiner Perkins,
and we didn't invest a penny in the March quarter ... We just
were having trouble getting comfortable."
Still, not everyone in Silicon Valley thinks private-company
valuations are going to take a big hit.
"When you look a year from now, two years from now, I'm not
sure you're going to say prices came down at high-quality
companies," said Sergio Monsalve, an investor at Norwest.
For venture capitalists, "growth is such a huge factor,"
said Golden Gate Ventures' Glenn Solomon. "And there's still a
ton of growth out there."