DealBook: Square Near a Deal to Value It at $3.25 Billion

Square Register uses the company’s reader and an app to turn an iPad into a credit card register.

For all of Square’s challenges, raising money has not been one.

Square, the mobile payments start-up best known for its pint-size credit card reader, is close to raising roughly $200 million, which would give the company an implied valuation of $3.25 billion, people briefed on the matter said. This financing round is expected to be led by Suhail Rizvi, the head of Rizvi Traverse Management, a small private equity firm that has made investments in Twitter and Playboy, these people added.

The hefty investment — the company’s third in less than two years — will help Square battle with the likes of Google, Intuit and PayPal. But it also puts enormous pressure on Square, led by Jack Dorsey, the co-founder and executive chairman of Twitter, to prove its worth.

The company, which is three years old and based in San Francisco, still has to prove that it will be a big winner in mobile payments — and that it will grow into a highly profitable business.

On paper, at least, Square’s value has soared in just a short period of time.

Last summer, it raised $100 million, valuing the company at $1.6 billion. Several months before that, Square had another investment at a $240 million valuation. All told, the company’s valuation has grown by 13.5 times in less than two years.

Still, it may have wanted more from this round.

In recent months, Square had been seeking an investment that would peg its value as high as $4 billion, people familiar with the discussions said. Although it found some investors willing to participate at that level, it ultimately preferred a different group. And those investors didn’t have the stomach for $4 billion, these people said.

Unlike Square’s previous financing rounds, which prominently featured big venture capital names like Sequoia Capital and Kleiner Perkins Caufield & Byers, this one was not led by a traditional Silicon Valley backer. In fact, several major venture capital firms declined to participate at the lower level.

A Square spokeswoman declined to comment.

In the increasingly competitive and crowded world of mobile payments, Square stands out.

Its marquee product is a square-shaped credit card reader that plugs into smartphone earbud jacks. It helps individuals and small vendors, like taxi drivers and nail salons, accept credit card payments on their mobile phones. Square provides the reader and the software free, but charges the users 2.75 percent of the transaction. Of that fee, it collects a small amount and sends the rest to credit card companies.

Adoption has been fast. In the first six months of this year, the company has roughly doubled the number of users to two million. At its current pace, it is processing $6 billion in transactions a year.

Since introducing the hardware, Mr. Dorsey has expanded the company’s offerings to include Square Register, an application that turns an iPad into a credit card register for small businesses, and Pay With Square, an app for customers to use.

Under Pay With Square, users can link their credit card accounts to trusted merchants and open “tabs” with these vendors. Once a tab is set up, a user can then walk into a store and simply tell the cashier to put purchases on his tab. The cashier, using Square’s software, will then see a photo of the user and confirm the purchase.

But Square, despite its early success, is still just one of many players trying to own the future of real-world payments.

Google recently introduced Google Wallet, a mobile app that lets users pay by tapping a phone on special readers at participating vendors. Several companies now have their own hardware, including Intuit, Verifone and PayPal, which has a triangle-shaped card reader named PayPal Here. Apple, with its loyal fan base and giant cache of credit card information, is expected to get in the game soon.

Square, meanwhile, will also have to prove success outside of its signature reader. Because of the fees it pays to third parties, the company makes very little on each transaction. And given the competition, margins will remain under pressure.

Instead, its financial future may hinge more on apps like Pay With Square, which could deliver customized ads and promote premium merchant services. The company has signed up more than 75,000 vendors, but it is unclear how many consumers are regularly using the app.

Claire Cain Miller contributed reporting.