
Snapchat Is Mulling Another Huge Round at a $3.5 Billion Valuation - voidfiles
http://allthingsd.com/20131025/snapchat-is-mulling-another-huge-round-at-a-3-5-billion-valuation/?utm_medium=App.net&utm_source=PourOver
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pud
The purpose of these big rounds, usually, is founder liquidity.

Snapchat could easily get acquired, making the founders (and early employees)
very rich.

But investors don't want them to sell yet. So investors buy a lot of common
stock (from founders/employees) at a big valuation, making the founders (aka
the only board members who aren't already rich) rich, so that the founders are
less interested in selling.

Some of the money goes to the company. But it's not usual for 20-25% of big
rounds to go to founders/early employees.

~~~
pkfrank
Thanks for this comment. It frames the valuation in a way that actually makes
some semblance of sense.

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wil421
HAHA 3.5 Billion Valuation!

Honestly I am afraid that Snapchat will suffer the same fate as MySpace or
DIGG once the younger generation finds something new (look at who uses
google+, no one and I am not talking about your techy friends). We can already
see young teens are leaving facebook. To be honest I stopped using it once my
parents and other older adults started joining and that was 2-3 years ago.

[http://mashable.com/2013/08/11/teens-
facebook/](http://mashable.com/2013/08/11/teens-facebook/)

~~~
wil421
Down vote all you want. This app was first introduced to me I was told:

"You can send naughty pictures to people and they cant save them."

~~~
atwebb
I'm not saying the valuation is justified but naughty pictures have proven to
be a very, very profitable industry.

~~~
rokhayakebe
You nailed it. Private porn that is safe and secure from the internet, and
your mom ever finding out. Snapchat panders to the wanton part in all of us.

~~~
adventured
Except it's not private and it's not safe, at all.

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programminggeek
Does anyone else find this valuation incredibly ironic given that in 1999
Yahoo! bought Geocities for $3.57 billion?

I mean, does anyone believe that Snapchat is going to ever be a service that
brings in billions of dollars in revenue?

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potatolicious
This is IMO the wrong way to look at it. Look at this more like Instagram.

Neither Snapchat nor Instagram are creating _new_ traffic. What they are doing
is essentially stealing marketshare and user engagement from competing
services like Facebook and Twitter.

Their valuation isn't their revenue potential, it's the opportunity cost to
Facebook, Twitter, et al for letting them survive.

If Snapchat is stealing $1bn of monetizable traffic from Facebook, Facebook
would be wised to pay some amount of money (<$1bn) to either shut it down or
bring them into the fold.

There is some _extra_ valuation here in fucking your competitor over.
Acquisition of hot social media companies like this is equal parts adding
monetizable traffic to your network (traffic they may have taken from you in
the first place...), as well as denying your competitors the ability to do the
same.

So, say if Twitter acquires Snapchat, their valuation will be some combination
of ${traffic_twitter_loses_to_snapchat} +
${traffic_facebook_loses_to_snapchat} +
${value_in_denying_facebook_access_to_this_traffic}

Whether or not that's worth $3.5bn is questionable, but there is some reason
behind valuing non-revenue-generating products with a positive valuation.

The main "bubble" part here is whether or not this is at all sustainable (IMO,
probably not). It's pretty easy to create something that steals an appreciable
amount of traffic from the incumbent social network behemoths. At these
valuations the cost to "recover" these eyeballs far exceeds how much the
traffic is actually worth in ad revenue.

~~~
rexreed
Even in the rarified atmosphere that is Silicon Valley, the Instagram
acquisition was unusual. Very much so. Acquired by Facebook just prior to
their IPO. Lots of motivations for that, but by no means is Instagram an
exemplar of anything. It's probably an outlier among outliers.

~~~
vidar
They were not about to ipo

~~~
brimanning
Not sure if you meant Instagram was not about to IPO, but rexreed meant
Facebook was about to IPO (acquisition: April 14th, 2012, IPO: May 18th,
2012).

~~~
rexreed
Exactly - Facebook was about to IPO and acquired Instagram pretty much right
before it. Thanks for posting the dates to clarify.

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w1ntermute
It really is astonishing how the most idiotic services gain so many users by
"going viral." And it just motivates more hackers to work on being the next
Snapchat or Instagram rather than putting in the effort to solve the real
problems that plague our society.

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nostromo
Coca-Cola's valuation is 170 billion. Not only do they not solve any real
problems, they actually create them. Same goes for every oil company in
existence.

If you want to change the world in a more serious way, SnapChat's valuation
should have as much of an impact on your determination as Coca-Cola's.

~~~
Permit
>Same goes for every oil company in existence.

We owe the 20th century and virtually every convenience in our lives to the
existence of petro-chemicals. There is absolutely no justification that oil
companies "don't solve real problems".

I would go so far as to claim petro-chemicals are the single most important
discovery in human history. (There are certainly downsides in the form of
global warming, pollution and environmental damage, but you've completely
ignored the massive upside).

~~~
nostromo
I agree. That sentence was more about how very-valuable companies can not only
be frivolous and create economic value (Coke), but can create real problems
while creating economic value (Exxon).

It wasn't phrased perfectly, but I'll leave it now since several people have
responded.

~~~
awakeasleep
It's easier to nit-pick your post than to disagree with the substance of it.

~~~
hnriot
but it wasn't a nit-pik, the post "Same goes for every oil company in
existence." is just wrong, however well meaning it was.

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dfrey
The only way Snapchat is worth $3.5 billion is if they have been secretly
saving all of the photos and they threaten to post them all online unless the
users pay $100 per photo.

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nwh
$3.5B for an app lots of developers could create over the weekend is
absolutely incredible. It also has absolutely no income, and very little
avenue for actually gaining any. I don't know what they're doing to need seed
money, I can only imagine that the service runs itself outside of tweaking EC2
instance sizes.

~~~
lolwutf
Is it just me, or does this finally scream 'bubble'?

~~~
nemothekid
People have been screaming bubble for years now. Facebook's IPO was a
"bubble." Instagram's aquisition was a "bubble." Pinterest is a "bubble."
While we all conveniently ignore that most startups today are generating real
revenue and firms like a16z are massively scaling back funding to early stage
consumer startups, I hardly think one "bad apple" (if it is, maybe they will
come up with some crazy way to make revenue, I'm not a psychic) is a sign of a
bubble.

~~~
LandoCalrissian
I largely agree with this, it seems the only area where valuations are getting
really crazy are in the app market. I assume the only real plan they could
have is acquisition, and even then I really only see Facebook taking that
dive.

~~~
nwh
Facebook have already cloned it.

[https://itunes.apple.com/app/facebook-
poke/id588594730](https://itunes.apple.com/app/facebook-poke/id588594730)

~~~
tomashertus
and failed badly...

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npalli
I will leave the bubble question aside and ask what is the money raised being
used for? Infrastructure to do what? Doesn't snapchat delete the photos after
the other party sees them? Or this another ad play where photos are stored and
some big data program will create targeted ads.

~~~
judk
The photo content is not at all relevant to ads.

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cs702
_" Besides the huge piles of investment dough being poured into [these
companies], here’s what else [they] have in common: Little to no revenue. That
does not seem to have stopped a panoply of venture and other investors from
jumping in and ponying up with huge amounts of cash for the privilege of
investing in several fast-growing startups, hoping to grab ahold of the next
Twitter or Facebook early."_

I don't know anything about Snapchat's internal operations or plans, and
therefore can't really judge whether the company will eventually figure out
how to make enough money from its self-destructing messages to warrant a $3.5
billion valuation today. What I DO know is that whenever investors start
"jumping in and ponying up with huge amounts of cash for the privilege of
investing" (in new companies with no revenues), there's a good chance that
valuations are getting too optimistic -- and _that_ never ends well.

Maybe this time things really are different, but it's hard for me not to see
some parallels with the "dot-com bubble" of the late 1990's.[1]

\--

[1] [http://en.wikipedia.org/wiki/Dot-
com_bubble](http://en.wikipedia.org/wiki/Dot-com_bubble)

~~~
nemothekid
Are there any examples of any other companies other than snapchat that are
raising a huge amount of money with little to revenue, or revenue potential?
While its important we don't repeat the mistakes of the past, I'm hesitant to
claim that all of Silicon Valley will burn to the ground because solely
SnapChat was a bad investment.

~~~
xgarland
Ever heard of Pinterest? They definitely fall into that category of companies
with little to no revenue, but have a massive valuation.

Here's the thing: While users may not be paying with their dollars just yet,
almost all of them are paying with their time. So, it's not completely absurd
that certain companies are able to attract such capital if investors continue
to recognize huge potential in the long run.

~~~
jmathai
The only thing Pintrest and Snapchat have in common is that they haven't
started trying to monetize yet.

Pintrest has about a gazillion ways it can monetize. I'm really anxious to see
how they do it.

Just today while driving in the car my wife said "Cool, I just got a [push]
notification from Pintrest that a fabric I pinned at JoAnne Fabrics is on
sale".

Pintrest is a gold mine and my guess is that they've got a rosey future that
doesn't end in acquisition.

Snapchat has an engaged audience. I can't imagine how they'll _really_
monetize their user base in a meaningful way. But they're a really attractive
acquisition opportunity for a bunch of companies.

Obviously investors might be more bullish on Snapchat's revenue generating
opportunities...

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cygwin98
One thing I don't get Snapchat is that if I use an iPhone (Android probably
has other way to do so), I can always make a screenshot whenever I open your
naughty pictures, right? So what's the point even if the naughties get deleted
in a few seconds, if I have a local copy anyway?

I know I don't belong to the targeted demographics, just out of curiosity.

~~~
brianwawok
Its meant to be like talking. No record by default. Sure you can "hack it" and
keep a copy.. but you can tape record a spoken conversation also, right? Just
not 100% of every spoken words won't be written down, just like 100% of
snapchats won't be saved by the end users.

~~~
cygwin98
Now I got the social piece. Thanks for the explanation.

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biot
Like SnapChat's messages, the $3.5 billion valuation is self-destructing as
well.

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brd
I have to say, I'm a little shocked that Snapchat's valuation is only ~10%
lower than Pinterest's (3.8bn)

I would think there is a pretty huge difference between their potential
revenues

~~~
abat
I think people are valuing Pinterest more on a per user basis, but Snapchat
has a lot more users and is growing faster.

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akuma73
The valuation is based on what I would call "defensive valuation".

Instagram was bought for $1 billion, not because it had any billion dollar
revenue generating potential. It, however, had the potential to erode
Facebook. So Facebook buys it out as a defensive move.

Snapchat, given its huge user base, could potentially threaten Facebook, so
Facebook would be forced to acquire them, purely as a defensive strategy.

Think of it as the cost of defending their empire.

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davtbaum
This is ridiculous. How exactly does Snapchat plan on profiting from their
user base if they have yet to have proven a revenue model?

Sure, advertisements seem like the end game, but how will they be targeted?
How can they be implemented without severely affecting application experience
and user expectations?

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sksksk
Something that always bugs me about valuations, wondering if someone could
explain.

A lot of these investors probably have multiples. So if someone $1m in a
company for 10%, and the company sells for $5m, they'll get back at least $1m,
rather than $500k.

If investors are only putting money in with these multiples, then doesn't it
artificially raise these valuations? If so, is there a measure for the
valuation of a company that takes this into account?

~~~
pmarca
Typically investments in private technology companies include a provision
called "liquidation preference" where investors get their money out before
other shareholders (managers and employees) get paid on an exit.

A common term is "1x liquidation preference" which is the example you give --
if I put in $1M, I get $1M out before anyone else gets paid, even if the sale
valuation is less than the valuation at which I invested.

Sometimes you see 2x or 3x liquidation preference, in which investors get that
level of return before other shareholders get paid. This is considered "less
common-friendly" and is a worse term if you are a founder or employee.

There are also other variations on this general idea that you see particularly
when valuations get high.

So, in a case like the purported Snapchat round, a new investor would actually
look at the investment as a combination of financial instruments -- think of
it as a call option (participate in appreciation above the entry price)
coupled with a put option (get your money out if the company sells at least
for more than the amount of invested capital).

The more money involved, the more complex this gets and the harder it is to
evaluate the true pros and cons of the investment based on public reporting.

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adventured
So the investors funding Snapchat at a $3.5+ billion valuation, think it will
one day be worth $10 or $15 billion (at least). Yeah....

The Fed has finally done it with their hyper loose monetary policies (for the
third time in 15 years). I think it's safe to assume the dotcom insanity has
begun again. It's also drastically pushing up dotcom valuations in the public
market as well.

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confluence
Just a little tip for my fellow programmers.

Valuations are just numbers that are pulled out of a hat.

/tip

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alt_f4
Sounds like yet another round of investor hot potato.

