
Snapchat Said to Seek Up to $19B Value in Funding Round - bko
http://www.bloomberg.com/news/articles/2015-02-17/snapchat-said-to-seek-up-to-19-billion-value-in-funding-round
======
bko
Generally speculative investments priced via proxy. Not sure if venture
capital is much different but wall street types pay close attention to ratios.
One of the important ratios is price to earnings, which is the dollar price
you have to pay for a dollar of earnings. If the company doesn't have any
earnings, you can look price to revenue. If no revenue, look at price to user
acquired.

For instance, Facebook paid $28 per user [0]

The median cost across all the acquisitions was about $92 per user in 2012 [1]

I'm not sure about the number of users Snapchat but the article says that
there are 700 MM snapchats sent daily. Assuming 700 MM users (almost certainly
overestimated), the cost per user at ~$27. Snapchat is said to be the #3
social app among millennials though [2].

This is probably how they got to this number.

For proxy, Facebook makes about $2.81 revenue per worldwide user (US is higher
at $9) with ~30% operating margin [3].

Would love to hear someone working in VC comment as to the rationale used.

[0] [http://www.statista.com/statistics/222363/price-per-user-
at-...](http://www.statista.com/statistics/222363/price-per-user-at-selected-
tech-acquisitions/) [1] [http://www.wired.com/2012/04/opinion-baio-instagram-
trend/](http://www.wired.com/2012/04/opinion-baio-instagram-trend/) [2]
[http://techcrunch.com/2014/08/11/snapchat-is-now-
the-3-socia...](http://techcrunch.com/2014/08/11/snapchat-is-now-the-3-social-
app-among-millennials/) [3] [http://files.shareholder.com/downloads/AMDA-
NJ5DZ/3988722759...](http://files.shareholder.com/downloads/AMDA-
NJ5DZ/3988722759x0x805520/2D74EDCA-E02A-420B-A262-BC096264BB93/FB_Q414EarningsSlides20150128.pdf)

~~~
mathattack
I think you did a very good job describing the valuation process. In the
absence of a PE ratio, folks fixate on $ value per user.

I'm not a VC, but I've seen a lot of valuations. Two caveats I would add:

1 - Investors will modify the amount based on growth. (300 million users at
flat growth is worth less than 300 million users growing at 20% a quarter.
This is the Twitter problem.)

2 - Investors will pay more for higher value users. Even if the path to
monetization isn't obvious, high income users are worth more than low income
users.

~~~
ankurpatel
$ value per user makes sense but with viral growths there can be a viral
decline in user base as well. To make it sustainable you need more than just
an app which Facebook has. FB along with being an app is a site and a platform
to log into any site you want and Snapchat is not.

~~~
mathattack
All very true. The value per user is just an imperfect heuristic when other
measures (such as cash flows) aren't available. It's also a decent (and still
imperfect) measure for acquisition value, though it has the limits that you
mentioned.

------
ankurpatel
A $19B company created in 3 years without any revenue model from nothing by a
college kid. This is bit shocking. This smells like a Ponzi scheme as the
valuation keeps increasing over time even when there is no revenue generated.
The losers in this scheme will be the last round of investor who will lose it
all.

~~~
rezistik
It's a bit terrifying.

There are enough real companies with real revenue outside of marketing that we
can probably safely say this isn't complete repeat of the Dot Com Bubble.

But damn does it rhyme in some parts. Damn does it rhyme.

~~~
ryanSrich
SnapChat is starting to sell ad space. So I'm sure they'll generate hundreds
of millions of dollars and end up being fine. A company that large doesn't
just fail over night. Founders and early employees are set for life.

The real tragedy imo is that these companies are idolized by the valley hive
mind. Smart, young developers seem to be more interested in building social-
mobile-ad-generating-app-number-twomillion than work on something worthwhile.

Worthwhile being healthcare, education, space travel, energy, etc. Not some
viral app that sells ads.

------
lawnchair_larry
I'm not sure why revenue is relevant. No revenue doesn't imply an improper
valuation nor a bubble. Those things might or might not be true, but if they
are, it's not related to revenue.

Startup valuation is not determined in a vacuum. Don't ask how the company is
going to serve its future self, ask how it's going to serve the free market
that wants to own its assets (engaged users).

You think there aren't a ton of companies who wouldn't mind 200 million users?
How they monetize them can be their own problem. Snapchat's value prop, at
present, lies in the grip it has on the population. Rarely can a company just
go out and buy that. They have to invest in products and services and will
probably fail.

They may monetize it in the future, which would just be gravy. It's still
incredibly valuable to a few companies who can afford it.

------
chroem-
For context, that's a fleet of five space shuttles when adjusted for
inflation. Somehow I have some doubts that a photosharing application with no
revenue is actually worth five space shuttles.

Sure, they may have a lot of users, but so does the company that makes the
paper I wipe my ass with.

~~~
callmeed
_> Sure, they may have a lot of users, but so does the company that makes the
paper I wipe my ass with._

If you use Charmin to wipe your ass, they are owned by P&G, which has a market
cap of $230B.

~~~
SeoxyS
EDIT: my napkin math turns out to have been closer to "toilet paper math"
because it was completely wrong. See child comment for details.

Interestingly, Charmin as a brand has revenue around ~2.5B[1], which when
multiplied by P&G's P/E ratio of ~25[2] gives you a rough idea of the brand's
value as part of the parent company's market cap: 60B.

So, the paper you wipe your ass with is worth about 3 snapchats.

[1]: [http://www.statista.com/statistics/188710/top-toilet-
tissue-...](http://www.statista.com/statistics/188710/top-toilet-tissue-
brands-in-the-united-states/) [2]:
[https://www.google.com/finance?q=NYSE%3APG&ei=t77jVOC5DMeoiQ...](https://www.google.com/finance?q=NYSE%3APG&ei=t77jVOC5DMeoiQLy3ICQDA)

~~~
patmcc
The E in P/E is earnings (profit), not revenue. Your valuation is probably an
order of magnitude high. Also your first link uses the vague "sales" which
could mean end retail sales, in which case revenue to P&G would be even lower.

There's no way Charmin is worth $60B.

~~~
SeoxyS
Good point. Edited my comment to reflect it was bad math.

------
filmgirlcw
I still find this VERY hard to believe. I could be wrong (and very well might
be), but Snapchat still seems far more of a Groupon type of company than a
Facebook.

We'll have to see how well they can deliver/scale Discover, but I remain
unsure they can ever find a way to exit and become worth this amount with the
types of users they have (very young, very unloyal to services, very difficult
to monetize because of youth -- look at the ridiculous Snapcash product for
instance -- requires a debit card/user to be 18, when 80% of Snapchat's
audience is 13-17 and thus unable to use the feature).

I just don't know.

~~~
k-mcgrady
I know it's early but the stats from publishers on the discover feature are
really good. Driving lots of traffic. It's weird they put that restriction on
debit cards when pretty much all bank account holders regardless of age get
one. A Google of 'debit card age' shows a box at the top of the page stating
in the UK children as young as 11 receive them. However if kids start spending
lots of money through Snapchat parents might start banning them from it -
which would be more damaging to Snapchat long term.

------
ankurpatel
Why is this story no longer on the front page of hacker news? Did YC get
pressure from Snapchat employees or VC's?

------
chris_va
Remember that this will almost certainly be Preferred stock, not Common stock.

That means that even if Snapchat sells for $1B tomorrow, everyone who invests
at the $19B valuation still comes out positive.

------
jcampbell1
Didn't Snapchat close a round 6 weeks ago for $500M @ $10B. How does this make
any sense? Surely $500M buys enough runway to not need to do this.

~~~
jdhawk
Cashing people at at higher multiples.

~~~
ChuckMcM
This is always a possibility. Groupon being the poster child for that of
course.

------
Cherian
I don’t use Snapchat. Never really figured it out. But I hope Snapchat becomes
the competitor that Facebook needs.

Props to the founders for not selling out.

~~~
nwenzel
Check out Snapchat Discover. It really doesn't have anything to do with
instant messaging. It's more like headlines that you can dive into or move on
from.

~~~
dhimes
EDIT: Nevermind- it's in the app. Really dislike that web page, but since it's
an app, who cares?

I'm certain that this is a stupid question- but is it snapchat.com? I went to
that site and I see all black- probably flash or auto-start video or
something.

Is there a deep link where there is a menu or something? I didn't see anything
called discover on the front page.

------
Focalise
Of course there is a bubble. The interest rate has been at zero for years.

------
logicallee
First, an analogy.

In my very humble opinion the value of snapchat is set similarly to how the
value of MySQL was set at $1 billion at acquisition by Sun seven years ago, a
tremendous multiple, despite its being open-source at the time with next to no
revenue. (Its revenues were something like $48 million, so Sun purchased it at
15-20 times earnings.) In the opinion of myself and others, the price was set
by the value, to _Oracle_ (the leading database company), of MySQL _not_ doing
an IPO as it had been planning shortly before[1], or Sun not competing with
Oracle head-on. In fact, within 24 months of that acquisition, Oracle, a
roughly $100 billion company[2] besieged by competition from open-source
databases like MySQL and a flagging share price, itself completed an
acquisition of Sun Microsystems for $7.4 billion. What are the chances that
would have happened if Sun hadn't first paid $1 billion to own a direct threat
to Oracle? According to one person, Larry Ellison often said, "It’s not enough
to win—all others must fail." [3]

Basically, there is an elephant in the room setting the price of Snapchat. The
price has nothing to do with revenues and everything to do with the elephant.
The elephant is trading at a market cap of $211.61B. That elephant is
Facebook.

Snapchat is worth $20 billion because Facebook is worth $211.61 billion and
it's a direct threat.

It was about a year ago that Facebook paid $20 billion for Whatsapp[4], when
FB was trading at less than it is today. (And in a move some viewed as
desperate [4]).

$19 billion seems downright reasonable viewed in that context. What are the
chances Facebook will pay more for it? Not low.

Snapchat is three and a half years old and has about 200 million monthly
active users. This chart from around the time of the whatsapp acquisition is
all you need to look at: [http://slicecommunications.com/wp-
content/uploads/2014/02/Wh...](http://slicecommunications.com/wp-
content/uploads/2014/02/Whatsapp-users1.png)

Snapchat is a threat: [http://www.businessinsider.com/snapchats-monthly-
active-user...](http://www.businessinsider.com/snapchats-monthly-active-users-
may-be-nearing-200-million-2014-12)

And Facebook has the money and drive to make it bolster their own numbers
instead. This is why it's worth $20 billion.

-

[1] [http://www.bloomberg.com/bw/stories/2007-06-26/the-worth-
of-...](http://www.bloomberg.com/bw/stories/2007-06-26/the-worth-of-open-
source-open-questionbusinessweek-business-news-stock-market-and-financial-
advice)

[2]
[http://www.wolframalpha.com/input/?i=oracle+market+cap+Apr+2...](http://www.wolframalpha.com/input/?i=oracle+market+cap+Apr+20%2C+2009+)

[3] [http://steveblank.com/2014/09/25/watching-larry-ellison-
beco...](http://steveblank.com/2014/09/25/watching-larry-ellison-become-larry-
ellison-the-dna-of-a-winner/) (apparently this quote appropriated from Gore
Vidal though)

[4] [http://www.cnbc.com/id/101432344](http://www.cnbc.com/id/101432344)

[5] [http://www.cnbc.com/id/101429929](http://www.cnbc.com/id/101429929)

------
mdjdk
What a crazy world. Help my friends and I raise $500 million and we will build
a cheap, modular and safe energy source that could end our oil addiction,
poverty and drought in the third world and fuel a new wave of technological
innovation based on nuclear engineering (transmutation). Or we can send funny
pictures to our friends. I love these times.

~~~
lawnchair_larry
False dichotomy. If you could actually deliver on that, you would have no
problem getting 500 million.

~~~
mdjdk
Who says we can't? It's a risk game, you wouldn't know as soon as with
SnapChat. Hence the low amount of investment in "real" ventures.

