Ah, the evolution of the out of touch curmudgeon:
1995: “These kids and their internets!”
1997: “These kids and their emails!”
2003: “These kids and their Google (GOOG) !”
2005: “These kids and their MySpace!”
2005: “These kids and their YouTube!”
2006: “Face what? I thought it was those kids and their MySpace. How is this different? So it’s not really at all different. Why is it such a big deal? FINE. These kids and their Facebook (FB) !”
2007: “These kids and their Twitter!”
2012: “These kids and their Instagram! I mean it’s – wait, what?! $1 billion! For sepia-toned pictures?! WHAT ON EARTH IS HAPPENING?!”
November, 2013: …
That last one’s blank because our poor old-school investor, Zeke McGillicutty, suffered a severe heart attack when he read that some 23-year-old punk turned down $4 billion for his company built on an idea that boils down to “texts that delete themselves.”
"What Sort of World Do We Live In?"
Thing is, there was one thing Zeke and Snapchat’s Evan Spiegel do agree on: that Snapchat isn’t worth $4 billion. It’s just that Evan Spiegel appears pretty certain it’s worth more than that. Like, $4 billion worth of sure. Which makes him either a shrewd visionary…or a complete moron. Only time will tell which. It’s just too bad Zeke won’t be around to see it.
But moving beyond the public outcries, why DID Spiegel and the other people behind Snapchat turn down the money? What do they imagine is going to happen for Snapchat that will demonstrate they deserve a valuation of MORE than $4 billion?
There are reasons why Snapchat might have been smart in turning the offer down. There’s certainly plenty of recent stories of tech companies that wisely ignored buyout offers early on only to be worth many multiples more than what seemed like a generous offer at the time. But then, Zeke and his ilk have some pretty sound reasoning for why that’s all a buncha hogwash, too.
“These Kids are Sending Each Other HOW MANY Sexy Pictures?!”
Simply put, THIS is why Snapchat turned down the offer. With 30 million users, Snapchat’s gone from launch to 60 percent of Instagram’s users in just two years. That sort of explosive growth alone is enough to make investors salivate. And there’s more. Those 30 million users are sharing about 400 million “snaps” a day. We assume. It was 350 million in September, which was an absurd growth from the 200 million a day rate in June. So, basically, in a little over one quarter, the company doubled its usage volume. Of course, that June number was quadruple the 50 million snaps a day the service recorded in December, so really, it’s slowing down, if anything.
It’s also a ridiculous level of engagement. Twitter, a company that I need not remind you currently has a valuation north of $20 billion, has 500 million tweets a day. And this after more than five years and with almost five times as many users.
And it’s not just that there are many, very active users. It’s the demographic the users are in: 13-23. Teens and young adults are an elusive, all-important demographic that can define trends and dictate where money’s going to be made in the coming months and years. It’s precisely why there was such a kerfuffle when Facebook’s David Ebersam admitted the company appeared to be losing SOME teen users in its most recent earnings report.
And, as the numbers above show, the level of user engagement in that demographic is off the charts. While other social networks carefully chase those users who will stay active on their platform, Snapchat has the most active users imaginable flowing into theirs.
“How Much Money Could That Possibly be Worth?!”
Revenue is where the rubber meets the road. And Snapchat has none. Clearly, that's not the long-term plan. Just the present reality.
So where is it going to come from? Right now, it’s investors. The company raised $60 million in June based on an $800 million valuation. Now, the company’s reportedly planning another round of capital raising based on a $3.6-4 billion valuation (which, incidentally, means that the people who got in in June have hypothetically seen their initial investment grow 500 times more valuable in just six months). However, the different between a public company and a Ponzi scheme comes from the afore-mentioned revenue, and Snapchat will eventually have to generate some.
Twitter, for example, reported revenue of $166 million in their most recent earnings report, which would annualize to just over $650 million a year. Meaning that Twitter, at its current valuation, is trading at a price a little over 30 time its annual revenue. Meaning Snapchat, assuming it’s going to have a similar valuation to Twitter, only has to get to $133.33 million a year in revenue, which is $33.33 million a quarter, to warrant being worth $4 billion. That’s basically squeezing $1 in ad revenues per user per quarter, who are each currently snapping (Does it work as a verb? How are the kids using it these days?) over 13 pictures or videos a day. Twitter, with its much lower rate of user engagement, is currently averaging $0.76 in revenue per user per quarter.
And, of course, that's based on current numbers. Twitter projects to do much better than that moving forward. And, given that Snapchat's users are more than five times more active than Twitters, it's not hard to imagine they might ultimately be even more successful at monetizing the eyes on their platform.
“Durn Kids Can’t Make Up Their Minds!”
So it seems as though Zeke’s just way off base. Fact is, Snapchat’s easily worth $4 billion. Hell, it’s probably worth considerably more than that.
Except that Snapchat’s trading on one asset that they do not own: cool. The rate of growth the company has displayed is so rapid it really makes one wonder. Could it, hypothetically, shrink just as fast? What’s Snapchat worth if teenagers just decide to stop using it? How sure are we that, in five years, they won’t? And before you answer that, consider that five years before today there was no Snapchat (or Instagram, for that matter) and the idea that teens would be leaving Facebook in any real numbers seemed downright preposterous.
Ultimately, it’s hard for guys like Zeke to believe that $4 billion can just materialize out of thin air. The company wasn’t even a twinkle in someone’s eye 30 months ago. And, what’s more, the idea itself doesn’t exactly seem wildly innovative. If anything, it’s a tweak on Instagram. And one that, let’s face it, wouldn’t be that hard to replicate. Or outright steal.
Take Facebook, for instance. The company’s worth $120 billion and a model for innovation, right? Except, maybe not so much. Essentially, it was a more-timely version of MySpace that maintained its coolness and cache with young users by remaining exclusive for just long enough. Now? Anyone can join. Including the parents of the teens and college students that used to drive its coolness and cache. Which is leading a new generation of potential users to eschew it in favor of whatever cool new service is lurking around the corner where they can communicate without their parents or ads. Like, say, Snapchat.
So who’s to say that the very act of attempting to monetize their service is exactly how Snapchat will make itself passe and, in turn, destroy the very thing that gives it value? It’s easy to assume that won’t be the case, but given that the company itself didn’t even exist three years ago, how crazy is that? If it can go from zero to $4 billion in two and a half years, who’s to say it can’t go from $4 billion back down pretty close to zero in the next three? If the teens start flooding to whatever the next big thing is, it's hard to believe Snapchat's ever going to hit the revenue numbers it would need to. Especially if major competitors just start copying their idea and allowing users to create self-deleting messages, pictures, and videos in a way similar to what Facebook did with MySpace and Friendster.
Clearly, whether Facebook was all that original an idea or not, Mark Zuckerberg’s currently worth $30 billion or so and he made a really smart choice by turning down purchase offers that, at the time, seemed like utterly ridiculous amounts of money. The fact of the matter is that, in today’s economy, Snapchat really is worth $4 billion, if not more. That’s why the offer was on the table. Nobody with $4 billion to spend is dumb enough to offer it without having done their research. And if they are, send them my way. I have a bridge they might be interested in.
However, Zeke’s skepticism may not be that far off base in the long term. Only time will tell, but if we’re entering a world where a hot new social media platform that’s going to capture the imagination of a new generation of teens is popping up every three years, maybe the valuations behind all of these social networking companies needs to be rethought. The attention of a teenager tends to be fickle, and trendsetters stay that way by moving on to the next big thing as soon as everyone else has found the old one.
And, if that ends up being true, maybe that surly ole badger Zeke had a point all along.
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