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2016 IPO Prospects: Snapchat Needs to Up Monetization ASAP

Posted on Monday, Feb 22nd 2016

According to a recent eMarketer report, the global mobile phone messaging app user market was estimated to have grown 32% over the year to 1.4 billion users worldwide in 2015. The sector is dominated by Whatsapp, which recently announced a milestone membership of more than 1 billion active users, and Facebook Messenger – both of which have presence in more than 20 countries worldwide. By 2019, eMarketer expects this number to grow to 2.19 billion users.

Snapchat’s Financials

Whatsapp may be among the biggest mobile messaging apps, but Snapchat is probably one of the more controversial ones. Pacific Palisades, California-based Snapchat was founded as a Stanford class project by Evan Spiegel, Reggie Brown, and Bobby Murphy. Like other mobile messaging apps, Snapchat sends mobile messages including photographs and videos over the Internet. The difference being that Snapchat allows the message to be viewed only for a few seconds before it self-destructs. The ephemeral nature of the messaging service has made it a preferred app among teenagers. It has led to the evolution of “sexting” where users are able to send messages without worrying about consequences.

The Snapchat app is available for free, but it earns revenues through in-app purchases such as lenses for photo-shopping selfies and features that allow replays and advertising. The company began experimenting with monetization in October 2014. It does not disclose financial details, but market reports suggest that in 2014 it earned $3 million revenues and lost $128 million. In 2015, revenues were trending at $100 million.

Snapchat is venture funded so far with $1.2 billion in funding from investors including Alibaba, Fidelity Investments, Glade Brook Capital Partners, York Capital Management, August Capital, Yahoo!, GIC, Kleiner Perkins Caufield & Byers, Coatue Management, Tencent, SV Angel, Benchmark, General Catalyst Partners, Institutional Venture Partners, and Lightspeed Venture Partners. Its last round of funding was held in March last year when it raised $537 million at a valuation of $16 billion. Valuation has grown significantly since the $10 billion valuation as of December 2014 and $2 billion as of December 2013.

Snapchat’s Monetization Focus

Snapchat has been focused on improving monetization capabilities since last year. The app has over 100 million daily average users and would like to leverage this pool to earn revenues. Snapchat is counting on advertising as its revenue driver and it is seeing mixed reaction from advertisers. According to management, Snapchat gets 7 billion daily video views and is selling ad packages for as much as $10 million. But its ad business isn’t very stable. Unlike other media companies, Snapchat does not offer targeting and analytic capabilities for ads delivered through its network. It makes it difficult for advertisers to ascertain the true impact of the ads. That is one of the reasons why there are days when a user doesn’t see any ad at all.

It is hoping to improve this with products like Live Stories, Discover, and Local. Discover is a content discovery site that allows users to see updates on news, sports videos, and micro television channels through its tie-ups with media companies like CNN, ESPN, and The Food Network. Live Stories allow users at an event or a location to contribute Snapchats of the same story and Snapchat Local gives users access to localized information. Snapchat is using these tools to help advertisers deliver their ads to a target population. It is also working with third party ad-effectiveness measurement partners to help advertisers understand the benefits of the ads.

But the efforts aren’t helping Snapchat much. According to recent news reports, Fidelity Investments, an investor in Snapchat, wrote off 25% valuation on its investments, thus reducing Snapchat’s valuation to $12 billion. Last year, Snapchat commented about its intention to go public. It may need to work harder on its revenue model before it finally decides to take the plunge.

Currently, the market is in a correction mode. If Snapchat cannot significantly increase its monetization, valuation will further drop. A $100 million revenue run rate company will not be able to sustain a $12 billion valuation  in the current condition. Furthermore, profitability is still a concern, as is the wobbly, unconvincing nature of the revenue model.

This company is one of the worst examples of the unsavory Unicorn mania that we have seen in the technology industry over the last couple of years. If it tries to go public, it will be hammered. And, I don’t know if there are any suckers left who would want to invest in it in the private market anymore either.

Tough days ahead!

This segment is a part in the series : 2016 IPO Prospects

. Airbnb Sees Skyrocketing Valuations
. Actifio Looks Ready
. AppDynamics May Sustain Unicorn Valuation
. Automattic Needs to Justify Valuation
. Avant Will Have to Wait and Watch
. BuzzFeed Feeds on Native Advertising
. Coupa Manages Expenses Expertly
. Datto Bootstrapped First, Raised Money Later
. Is Uber Ready to Ride the Stock Market?
. Overfunded Domo Looks Promising
. Houzz May Unveil The Curtains
. DocuSign Looks Ready to Sign Up
. Illumio Rides On Security Trend
. Appears Ready to List
. Okta Prepares to Reveal Public Identity
. Palantir Wants to Stay Private
. Nutanix Files for IPO
. Medallia Bootstrapped First, Raised Money Later
. Slack Prepares to Communicate with the Market
. Twilio Expected to go Public Soon
. Snapchat Needs to Up Monetization ASAP
. Zscaler Sets IPO as a Long-Term Goal
. Warby Parker Should Look Before Leaping
. MuleSoft is a Unicorn, but Detailed Financials Remain Unknown
. Apttus Bootstrapped First, Raised Money Later
. Fanatics Expanding Its Playing Field
. Pinterest Finally Sees Revenues, But are they Enough?
. Tanium Bootstrapped First, Raised Money Later
. ironSource Strengthening its Revenue Generating Capabilities
. Anaplan Getting Ready to Go Public
. SecureWorks is Ready to List
. IPO-Ready Cloudera Wants to Wait and Watch
. HelloFresh Puts its IPO Plans on Hold
. Is Stripe Lining up Next?
. Qualtrics Bootstrapped First, Raised Money Later
. Skyscanner Bootstraps First from Scotland, Raises Money Later from Sequoia
. SurveyMonkey Will Likely Wait
. The Honest Company Makes the Online to Offline Model Work
. NantHealth Testing the IPO Markets, Yet Again
. BigCommerce Prepares to List
. Bloom Energy Likely to Stay Private
. Avast Software Preparing for a Listing, Yet Again
. Gusto Expands Beyond Payroll Processing
. InMobi May Have Missed the Bus
. Glassdoor Gearing up to go Public
. Human Longevity Leverages Machine Learning and Analytics to Increase Lifespan
. Blue Apron Cooking up an IPO
. Optiv Grows Inorganically
. Uber Eyeing Self-Driving
. The Trade Desk Files to List
. Deliveroo Delivers its Way to the Bank
. Selfie App Meitu Files to List on HKSE
. Apptio Files Despite Reduced Valuation and Mounting Losses
. Snap Snaps out of Chat Business to Justify Valuation
. From Bootstrapping to IPO, BlackLine Shows the Way

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