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.
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.
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.
Off the top of my head? Allow people to charge for subscriptions to their feeds and take a cut. People follow you, you make naughty pics and send them out, people see them. There's lots of ways for the leader to play with the timing and types of photos too. It makes the user's feel a connection since it's not publicly available, have private ones, etc.
Kind of like a paid /r/gonewild. Hmmm there are probably a number of porn stars/models that would buy into this.
$5.00 a month to buy into this snapchat feed. We can use the reverse Apple method give 30% to the model. If you could get 100k users to follow the models that would be 350K a month/4.2 million a year. We might be on to something.
Agreed. Ever since they added the feature to send a snapchat to multiple people, it turned into a narcissistic cesspool. After a while I couldn't even tell if the snapchats I was getting were even for me or for everyone on that person's list. The new "Snapchat Stories" was the nail in the coffin that made me uninstall it.
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.
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.
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).
Nobody believed Twitter would make massive $ two years in. There's never been a startup who achieved serious traction but wasn't able to monetize itself.
It's a bit of a counterfactual, because startups with large traction having difficulty monetizing don't typically go bankrupt, but sell. But that doesn't prove they wouldn't have been able to monetize at some point, and leaves us guessing.
One example is YouTube; they lost huge buckets of money in their entire independent existence, until Google's acquisition completely changed the economics of their bandwidth costs. Would they have been able to become profitable if they stayed independent? Maybe!
Another one (perhaps clearer) is Broadcast.com. Never turned a profit in their independent existence; never turned a profit for Yahoo after acquisition, either.
It's a bit of a counterfactual, because startups with large traction having difficulty monetizing don't typically go bankrupt, but sell
Interesting side or foot-note was that myspace went from 600m to 50m, first purchases (enabling vcs to exit) and then disposed of (by its BigCo purhaser) after not monetizing.
Digg, Myspace, BitTorrent, etc... at varying degrees were all able to monetize users and made millions upon millions of dollars while doing so. In fact, this answer from the founder of BitTorrent is to my point.
"Our main source of revenue is off the toolbars we push out, which isn't a great source of monetization, but it's something. You can do the math on how many installs we have and what the monetization of toolbars is, and subtract out the costs of having 50 employees, and you'll get a reasonable ballpark of how profitable we are, although the short answer is very. Even lousy monetization works well when you have more users than Twitter."
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.
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.
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).
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.
Coca-Cola isn't an idea, it's sugar water, something people have enjoyed for decades. SnapChat is a service that requires very little infrastructure when compared to Coca-Cola. Not to mention thousands of employed people vs a handful.
Watching a bunch of critical thinkers, developers and startups pull at straws trying to defend ridiculous payouts, evaluations and utopian end-games sounds more like 2009-era stock broker talk than it does anything positive or revolutionary.
huh? Providing value in a market has nothing to do having some direct and profound impact on society. They make drinks people like and are willing to pay for.
Like how teenagers are drawn to news about Taylor Swift or Justin Bieber (good news or bad), programmers are drawn to rare successes that are outside the norm.
It's fun to look at celebrity tech culture (just like it is to read the covers of the trashy mags at the checkout counters at your grocery store). Just because we see news like this doesn't mean that important, interesting, valuable work that helps people isn't being done somewhere else.
It's not as if we can cure diseases or solve poverty by writing code. I wish we could. What is a "real problem that plagues society" that a hacker could feasibly solve? I would really like to know.
We can't? There are many ways software can be applied to "real" problems.
Folding@Home[1] is one of the oldest examples of this. It is a distributed computing network that uses brute force to crack protein folding, which is imperative in our understanding and curing of many conditions. It also makes it easy for the everyman to contribute their computing power to the task.
We literally can help cure diseases by writing code.
Perhaps I wasn't clear. Of course code can be a very useful tool for people with expertise in other areas. I'm asking about what sort of problem a couple of typical hackers who are trying to start a business could feasibly tackle. Folding@Home is not a business, and requires more expertise in biology to build than most of us possess.
My point is that it's not like a bunch of us are trying to decide between building the next SnapChat or curing cancer, and only choosing the former because it's a faster way to get rich.
That's mostly a problem with the current laws in place, which encourage the creation of these frivolous services.
For example, let's say piracy was legal, who would need to get a new job?
Software developers, filmmakers and musicians, mostly.
If you think about it, the only reason why musicians/software developers make any money at all is because threat that we will be thrown in jail if we pirate the product (and the culture that "piracy is bad"). Given, there are trivial ways of getting around this barrier, but the fact of the matter is that nobody can officially sponsor a centralized service that you pay for that pirates content and make it extremely convenient.
If piracy was legal, the free software movement would have the most ground, because most people wouldn't be making any money off of the software anyway. Microsoft would go bankrupt. Apple probably would suffer a huge hit, but they would probably survive due to the fact that they manufacture their own hardware. So both would likely release the source code to the public if they want to hold any market share at all.
People would be able to legally sell jailbroken iPhones and Android phones with cyanogenmod installed by default for a fraction of the cost. And provide support.
Nobody would be making these shitty iPhone game apps like Candy Crush because there would be no money in it. Instead they would be making software for individual companies that are solving actual problems, like those self-checkout machines at the grocery stores for example. Most software development would instead be a hobby instead of being completely overvalued the way it currently is.
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.
$3.5B for an app lots of developers could create over the weekend is absolutely incredible. It also has absolutely no income, and very little avenue for actually gaining any. I don't know what they're doing to need seed money, I can only imagine that the service runs itself outside of tweaking EC2 instance sizes.
It doesn't run on EC2. It runs on Google App Engine:
xyzzy:~ harryh$ host www.snapchat.com
www.snapchat.com is an alias for ghs.google.com.
ghs.google.com is an alias for ghs.l.google.com.
ghs.l.google.com has address 74.125.29.121
ghs.l.google.com has IPv6 address 2607:f8b0:400d:c04::79
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.
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.
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.
"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]
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.
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.
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...
Do we have any engagement numbers on Snapchat? The deal with Pinterest is that most of their users also have some intent to purchase a lot of their pins. They also have a ton of data for precisely targeted adverts. I'm not even sure about the options Snapchat has for for monetization.
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.
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.
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.
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?
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?
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.
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.
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.