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Yahoo Reinvesting Cash Earned into Snapchat

Marissa-MayerYahoo, Inc. (NASDAQ: YHOO) will reportedly invest in the fast-growing startup Snapchat, using a small portion of the $9 billion made from selling part of its stake in the Chinese ecommerce company, Alibaba Group Holding Ltd. (NASDAQ: BABA).

Snapchat has been working for months to secure capital from several venture capital firms, money managers, and companies. Now according someone with inside knowledge, Yahoo has plans to commit anywhere from $10 million to $20 million in Snapchat, at a $10 billion valuation.

When approached for a comment, both Yahoo and Snapchat declined although The Wall Street Journal reported the investment deal is close to happening.

If things go as planned, Yahoo could achieve the same success as it did with the Alibaba investment although on a smaller scale. In 2005, Yahoo invested $1 billion for 40% of Alibaba’s state, which ultimately yielded tens of billions of dollars. This investment also gave CEO Marissa Mayer time to work things out with shareholders while turning a struggling business around.

Earlier this year, Alibaba considered an investment in Snapchat but ultimately passed. Two additional prior investors to include DST Global and Institutional Venture Partners have also been in discussions with Snapchat over the past few months pertaining to a possible new investment.

Along with its interest in Snapchat, Yahoo has been involved with other acquisitions this week to include a $12 million investment in MessageMe, a small startup mobile messaging company, and TechCrunch. More than likely, MessageMe, which raised over $10 million in venture capital funding, will be added as a new Yahoo communications tool.

The Snapchat investment would become a valuable strategic partner for Yahoo because the company is interested in finding new avenues for the distribution of apps, content, and ads within the world of mobile technology.

However, with a $10 billion valuation, Snapchat could create risks for Yahoo since the popular mobile service has not yet morphed into a revenue-generating business. Launched just three years ago, Snapchat has over 100 million users and thanks to the application, can send messages, photos, and videos that usually disappear after 10 seconds.

On the other hand, there are incredible opportunities for Yahoo since Snapchat will debut a new and similar service in the near future, this time specific to advertisements and news articles that disappear.

For many investors, there is a familiar ring to Yahoo’s big move to back a startup company at a hefty valuation, referring to the 2007 investment of Microsoft Corp (NASDAQ: MSFT) in Facebook, Inc. (NASDAQ: FB). If the investment deal is finalized, Snapchat would be one of the most highly valued startups in history to bring in near zero revenue.

Just last year, Facebook tried to buy Snapchat for $3 billion but the deal failed. Instead, Facebook spent $19 billion buying the mobile messaging application, WhatsApp. Then just a few months later, Snapchat announced that a new option was being added whereby users could chat via text.*

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