By Sarah McBride and Gerry Shih
SAN FRANCISCO, July 24 (Reuters) - Mobile payments company Square is close to securing around $200 million in new funding from private-equity investor Suhail Rizvi at a valuation of about $3.25 billion, a source familiar with the matter told Reuters, less than the company had hoped for.
Square, headed by Twitter co-founder and chairman Jack Dorsey, has secured previous financing from prominent venture capitalists and some said it had been seeking new funding at a $4 billion valuation.
Facebook's messy initial public offering -- it remains well below its $38 IPO price -- may be taking a toll on valuations of some companies around Silicon Valley, investors say.
Rizvi runs Rizvi Traverse Management, which has made investments in companies ranging from Summit Entertainment to microblogging service Twitter-- whose chairman, Jack Dorsey, is Square's chief executive officer.
The news of the funding was first reported by the New York Times.
A Square spokesman declined to comment, as did a spokesman for Rizvi.
While Facebook shares have recovered somewhat from the depths of their post-IPO dip, its shares are currently trading around $28.45, a big discount to the $38 they commanded when the company came to market in May.
Several companies raised money at steep valuations just before the Facebook IPO, which many investors expected would end with Facebook shares trading well above their IPO price. Perhaps the most prominent was online bulletin-board service Pinterest, which raised $100 million at a $1.5 billion valuation.
But others, including Square, were still talking to investors. Square aims to reinvent the payment function with mobile devices and sophisticated software and identity technologies.
The company 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 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 are sold on or go public.
That means Square, to justify a $3.25 billion valuation, would have to be worth at least $9.75 billion in a few years - a tall order for a company operating in a business with slim margins, deep-pocketed and established players, and extensive 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. (Editing by Eric Meijer)