How much does it cost to manipulate an entire market? Not much. And it’s getting cheaper!

It was leaked on Tuesday by “people with knowledge of that matter,” according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn’t closed yet, would give Snapchat a valuation of $10 billion.

That’s a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, “according to two people familiar with the matter.”

At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community’s darling ($9.3 billion).

Unlike the others in that group, Snapchat is marked by the absence of a business model and no discernable revenues. But there is hope that it could eventually pick up some revenues by advertising to its 100 million or so users, mostly teenagers and college students, without turning them off.

But in this climate, no revenues, no problem. Into the foreseeable future, the company will produce a thick stream of undisclosed red ink.

But the investment was an ingenious move.

For KPCB, a huge VC firm, the investment would amount to petty cash. Why did it do this deal? If it could exit at an enormous valuation of $20 billion, it would only double its money – a paltry multiple, given the risks. It would only make $20 million, still petty cash. But there was a reason….

By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.

Snapchat’s new valuation isn’t an isolated event. It’s a product of all recent valuations, and it is itself now ricocheting around and is used to set the valuations at other startups. That’s the multiplier effect. What seemed like an absurd valuation yesterday becomes the norm tomorrow, on the time-honored principle that once a valuation is already absurd, it no longer faces resistance from any rational limit. And nothing stands in the way for the multiplier effect to ratchet valuations ever higher.

Nothing, except the potentially troublesome exit for these investors. Because, without exit, these paper gains will remain paper gains, and eventually will disintegrate into dust.

To exit gracefully, investors can sell the company via an IPO mostly to mutual funds and ETFs that are stashed in retirement funds and investment portfolios. Or they can sell it to giants like Facebook or Google that can pay cash (borrowed or not) or print their own currency by issuing shares, both of which come out of the pocket of current stockholders. At the far end of both transactions are mostly unwitting retail investors.

Inflating Snapchat’s valuation by $8 billion with a few million dollars rigs the entire IPO market that depends on buzz and hype and folly to rationalize these blue-sky valuations. Unnamed people “knowledgeable in the matter” who leak these valuations to the Wall Street Journal are an integral part of the hype machine: It balloons the valuations of other startups. And it creates that “healthy” IPO market where money doesn’t matter, where revenues and profits are replaced by custom-fabricated metrics.

The hope is that the IPO market remains “healthy” long enough for investors to be able to unload hundreds of these companies at crazy valuations. The hype surrounding these valuations is creating more enthusiasm about IPOs in a self-reinforcing loop. The hope is also that the broader stock market continues to soar so that potential acquirers can print more overvalued shares to acquire more overvalued startups so that the exits can come about. Under the motto: after us the deluge.

The deluge will wash over retail investors.

While it’s possible that one or the other startup might become the next Facebook or Google, there are only a few Facebooks and Googles, but there are many startups whose business model and permanent lack of profits will eventually bring them down to reality, either in the portfolios of retail investors, or as a write-off by the acquirers, whose shares are also stuffed into the nest eggs of retail investors. Along the way, Wall Street extracts fees from all directions. That’s the Wall Street money transfer machine. It smells like a rose when all stocks go up, but when the tide turns…. OK, that won’t ever happen.

With fundamentals and economic realities having become totally irrelevant these days, economists are reassigned to tout stocks. Read…. Economist: Stocks No Longer Risky, Will Go Up ‘Steadily’

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