Did Starbucks just add $2.2B to Square's valuation?

By partnering with Starbucks, Square's revenue and valuation could soar.

Starbucks CEO Howard Schultz (left) and Square CEO Jack Dorsey. Roger Cheng/CNET

Jack Dorsey, the 35-year-old tech star who runs mobile payment company Square, today announced what he called an "epic" deal with Starbucks that could bring the "Pay with Square" app into the mainstream.

How big? It's too soon to say for sure, of course. But a firm that researches private companies, PrivCo, calculates that Square's deal with Starbucks will add $120 million in annual revenue for Square next year and, even more impressive, boost its valuation by $2.2 billion by the end of 2013. That would give Square -- already one of the most highly valued private tech companies around -- a valuation of $5.5 billion.

Pay with Square on an iPhone Square

It would also make Dorsey, who's splits his time between Square and Twitter, which he co-founded, worth $1.43 billion, based on his 26 percent stake in Square.

Square is best known for its device that turns your mobile phone into a credit-card reader. It's also been pushing Pay with Square, a service/app for iPhone and Android users that makes it easy to pay to a payment a store.

You link a credit card to the account once and open a tab at a store or restaurant. Once there, you don't have to pull out a wallet at all; the store can sense the phone's location and automatically transfer payment. The cashier can verify the identity of the buyer through a picture ID and name that pops up on their screen.

The trick for Square is getting stores and consumers to use it, which is exactly what the Starbucks deal is all about. PrivCo argues that while the deal with Starbucks will only add $5 million in revenue a year to Square, it will get a lot more because of the marketing benefits. Starbucks, the argument goes, will lead many other merchants to start supporting the service.

And that will lead to a big revenue boost and, ultimately, and a giant valuation. Square doesn't disclose its revenue, but PrivCo says it should be around $170 million in 2012, not including any help from the Starbucks deal. In April, Square said that it was processing transactions at an annual rate of $5 billion a year.

At a meeting this morning in New York with reporters, Dorsey didn't discuss the possible financial boost the Starbucks deal gives to Square. There is, however, an immediate boost in the form of a new investor. Starbucks is investing $25 million and Howard Schultz is joining Square's board.

 

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