Snapchat is not even 3 years old. It’s run by a couple of twentysomethings with no prior business experience. And it has never made a cent.
Yet the instant photographic communication app has attracted a $3bn all-cash offer from Facebook and, find according to the rumour mill, seek a $4bn offer from Google. Big amounts of cash to turn down considering the permanence of the valuation resembles that of the messages people send on it.
Evan Spiegel, Snapchat’s 23 year-old co-founder and chief executive, is said to be waiting until early 2014 before considering any offers for his brainchild. But just how credible is the price tag?
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This development adds Snapchat to an increasingly long list of tech and online companies boasting implied nine-figure valuations, despite not having any tangible income streams in the form of add-ons, advertising, pay per click income or otherwise.
Pinterest, for example, recently raised $225m from private investors, valuing the company at $3.8bn. With a business model based on the pooling and sharing of existing online content, it’s hard to see where the underlying value behind the $3.8bn is coming from, beyond pure speculation and expectation of future profitability. Square, owned by Twitter Co-Founder Jack Dorsey and said to be worth $3.25bn, is valued on arguably safer foundations based on proven technological innovation and is set to become a major player in the very lucrative payments sub-sector of the technology space. Yet, if there is so much doubt surrounding these valuations, why are top tier firms like Google and Facebook unerringly interested in many of Silicon Valley’s highly-valued startup companies? In essence, these firms are gambling.
Let’s go back to the Facebook- Snapchat scenario. From a financial point of view, with around $10bn cash and short-term investments on balance sheet, the acquisition of Snapchat is a small mouthful for the social networking site. More importantly, though, the operational synergies of any potential deal are lucrative for Facebook. Integrating the picture messaging app technology of Snapchat into the Facebook messaging platform could be the next big thing for the site after Graph Search. People this side of the Atlantic may not be aware that Facebook has already failed at integrating picture messaging into the site, after launching its now ailing app ‘Poke’ earlier in 2013. There is no room for two versions of Snapchat in our lives, it seems. And so, perhaps, we’re getting to the real value of the company – it is first to market and has built up significant brand loyalty.
A company like Snapchat can be valued today by projecting revenues for the remaining life of the company in its current state (private ownership) and discounting them back to the value of those revenues today, or using the valuations of other companies with similar lines of business as indicators of what the company is worth. Neither method is overwhelming reliable in Snapchat’s case. It is virtually impossible to predict revenues with any conviction from the company’s current revenue base of zero. Things get slightly trickier on the issue of how Snapchat can monetise it’s business’ operations over a sustained period. It is, however, reasonable to assume that the introduction of advertisements on each picture message will drive down user numbers, or at the very least, reduce the number of pictures users send through the app.
Unsurprisingly, Spiegel is confident. “We think we can build really cool stuff people want to pay for. The app is now a part of everyone’s day-to-day lives. That means that they will – I at least would – pay for a more unique experience,” he told TechCrunch in June 2013.
Investors that are betting on Snapchat at the $3bn-$4bn price range are making one of two wagers – that someone will either be bullish enough (Google or Yahoo), or scared enough (Facebook) to buy the company. Or, that Snapchat is in fact a killer business, and that it will stand up to the above valuation, on its way to becoming primed for an IPO. The next 2-3 years will reveal the true potential of the company and its messaging platform, and will reveal whether or not it’s current valuation is one of substance.