Posted on Tuesday, Jan 27th 2015
As I mentioned in my book Billion Dollar Unicorns, valuation without revenues have returned with a vengeance. The climax of these valuations was Facebook’s $19 billion acquisition of WhatsApp. Another Social Messaging firm Snapchat is going through similar valuation cycles.
Pacific Palisades-based Snapchat was founded when Stanford students Evan Spiegel, Bobby Murphy, and Reggie Brown were working together on a project for a product design class. The first version of the project was rolled out under the name Picaboo, before being renamed Snapchat.
In its newest avatar, Snapchat allows users to send to their friends photographs and videos of themselves that self destruct from the mobile device within a few seconds of viewing. Users can control the time for which their friends can view their messages by defining a timer of up to ten seconds before the message disappears forever.
The temporary nature of the messages on the app has attracted 13-24 year olds. Snapchat does not disclose their internal metrics but analysts estimate that they had 100 million users as of last year. According to a comScore report, the Snapchat app is ranked as the third most popular social media app among the 18-34 year old demographics. Snapchat is estimated to have a 32.9% penetration in this segment.
Of late, Snapchat is also growing inorganically. Earlier this month, they announced a $15 million acquisition of Epiphany Eyewear. Epiphany is known for their fashionable eyewear equipment that are embedded with HD video cameras. The glasses are available in memory options of 8GB, 16GB, and 32GB and retail for at least $299. Snapchat has not disclosed any details as to what they plan to do with the acquisition, but analysts believe that they are probably looking at ways to integrate their app with this wearable device. Last June, they had spent $30 million to acquire AddLive, a company that helped provide Snapchat with the capability for video chat services.
Besides internal metrics, Snapchat also keeps their financials hidden. It doesn’t have much to hide though. Snapchat is still exploring the possibility of earning revenues. Unlike other mobile messaging services that rely on in-app purchases, advertising, or like WhatsApp, on a subscription revenue model, Snapchat had no defined model so far.
They are exploring options including advertising and virtual good transactions. Earning advertising revenues through Snapchat is challenging, especially since messages are temporary. Additionally, unlike a Facebook ad that is visible to the user irrespective of the user wanting to see that ad, a Snapchat ad can only be viewed by the user if they click on the message. But that hasn’t stopped Snapchat from exploring advertisement options. They began by selling app ad space at a price tag of $750,000 for an ad that runs for 24 hours. Initial response has been mixed. Universal Pictures ran an advertisement for a movie Ouija and were pleased with the millions of ad views that were recorded. But others have been concerned because Snapchat can neither do targeted advertising nor justify ad spending by displaying detailed analytics, which makes advertising on their service very similar to advertising on TV.
Absence of revenues has not, however, stopped growth in its valuation. Snapchat remains venture funded with $648 million in funding from investors including August Capital, Yahoo!, GIC, Kleiner Perkins Caufield & Byers, Coatue Management, Tencent, SV Angel, Benchmark, General Catalyst Partners, Institutional Venture Partners (IVP), and Lightspeed Venture Partners. Their last round of funding was held last month when they raised $485 million at a valuation of $10 billion and was led by Kleiner Perkins Caufield & Byers, GIC, and Yahoo!. That is a significant increase from the December 2013 valuation of $2 billion.
Snapchat has had several potential buyers, but none of the acquisitions went through. Last year, Google was reportedly eyeing them and had pegged a value of $4 billion, but the deal did not materialize. Also, before the historic WhatsApp acquisition, Facebook had reportedly offered Snapchat $3 billion to buy them, but that did not succeed either.
Analysts now believe that Snapchat may be looking to go public. Last month, they hired Imran Khan, a Credit Suisse banker who helped with the Alibaba IPO, as their chief strategy officer. That could indicate a possible IPO in the future. But, I am sure the market would like to see a successful business model and detailed financial metrics before it agrees to invest in these crazy valuations.
More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns. Unicorns will also be discussed with some special guests during our 1M/1M Roundtable programs over the next few weeks. To be a part of the conversation, please register here. The term Unicorn was coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.
This segment is a part in the series : Billion Dollar Unicorns
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