When I look at tech innovators and trendy applications, I try not to be the old guy shouting at the kids, “Get off my lawn!.” Just because I don’t, as a 50+ old geyser with no clue, understand the appeal of something doesn’t mean that it has no value. My own kids point this out regularly when asking me to buy them the most recent “must-have” item. There are times, though, when I have to remind myself that popularity and success, while they may be different words with different meanings, are inherently linked in the world of social media. Yesterday was one of those times.
The aforementioned children and their friends leave me in no doubt as to the popularity of Snapchat. As a parent, I can assure you it is the communication method of choice among 10-15 year olds.
As an investor, what worries me is a $10 Billion valuation for a company that has never made any money, but that is not necessarily a function of my being old and out of touch. I don’t believe it is just my lack of understanding. I understand the argument that YouTube, Facebook (FB) and Twitter (TWTR) have all followed the same model of building user numbers before worrying about revenue. I also understand why. Bulk has value; if you are looking to only make a tiny amount of revenue on each user, then you need a lot of them to make a business viable.
This is not a question of never having made any money, though. It is one of never having even really brought in any revenue and seemingly not yet having a plan to do so, and $10 billion seems like a lot in that situation. Of course it could be that they do have such a plan and it is top secret. Maybe the revelation of this cunning plot to corner all of the money in the world was what convinced Silicon Valley venture capital company Kleiner, Perkins, Hawfield & Byers to make an investment in Snapchat that implies a $10 billion valuation.
It would seem more likely, though, that no such plan exists, and the VC firm’s decision was based on the fact that the $20 million that they invested is not such a giant sum for such a company and, being located where they are, they have seen other such bets pay off, so why not chance it. Either way, I will forego outrage about the investment and its implications and instead, focus on two things that that valuation actually does tell us.
Firstly, Snapchat’s owners look, so far, to have been extremely smart to turn down the much publicized $3 billion from Facebook (FB) at the end of last year. That view could change by the time Snapchat are actually ready to cash out, but one thing that won’t change is the second conclusion we can draw. Again in defiance of conventional wisdom at the time, Facebook were incredibly astute in making the offer.
As a company who had proved themselves expert at deriving revenue from popularity, the acquisition would have made perfect sense for them. Estimates of Snapchat’s monthly active users that I have seen vary from 30 million to 100 million, but whatever you believe that number to be, it’s a lot of people. Perhaps more importantly to Facebook at the time it’s a lot of young people. Acquiring Snapchat would have made Facebook’s reach that much more appealing to advertisers and to those to whom they sell data.
In the end, Snapchat didn’t sell to Facebook and is still private, so in reality what we think of the valuation, then or now, is irrelevant, as we cannot act on our views. What we can act on, however, is the re-affirmation that in the difficult to comprehend world of social media where popularity is far more important than profit, Facebook knows exactly what they are doing and probably therefore remain a great long-term investment.