I briefly looked into Snapchat right before the company officially announced its $60mm Series B Funding. See "The Hidden Costs of Joining the Billion Dollar Valuation Club." After turning down a rumored $3bn+ cash offer from Facebook, I decided to give it a try.
Part I of the story looks at Snapchat more with an investor hat on, i.e., the environment in which Snapchat operates as a company. Part II is are my experiences.
Summary. I can rationalize the appeal, but there is a distinct bias that must be overcome. If only WhatsApp had the UI/onboarding of Snapchat, it could be even better.
Part I. The Bubble?
Perhaps the most salacious numbers are not what companies sell for but the offers they turn down. The latter was certainly the case with Snapchat who turned down a reported $3bn offer by Facebook.
Not many companies have the luxury of turning down billion dollar acquisition offers, or in Snapchat's case, twice from the same company (Facebook). Maybe Snapchat was insulted that the value of the business only quadrupled since their $60mm raise in June. As an investor, I wouldn't mind 4x my money in a few months, but then again like most mere mortals, I play exclusively with my own money and do not have the luxury of aiming for venture returns.
I can't comment on the value of Snapchat. No one can - except those with the capital to help give the company a value. If there is any time for Snapchat's side to go all in, it's now, when they don't make any money. The value of zero revenue and millions of users is either 0 or infinity. And as anyone that has run a business with revenue can tell you, it is a lot harder from a valuation perspective once you actually make money. It's perverse, but it is how the game is currently played.
Along the binary outcomes framework of venture investing, Snapchat's management and investors will either look like geniuses or the shining symbol of the second internet bubble. As I wrote about during their Series B raise at the end of June (see "The Hidden Costs of Joining the Billion Dollar Valuation Club"), the only real losers of the zero outcome are the average employees (and to a lesser extent the institutional money). If you are an "average employee" with 0.1% of the company, you'd be thrilled at a $3bn payday. You'd make $3mm. If you were a senior/strategic hire who happened to have 1%, you'd make an amazing $30mm. Given the company's trajectory, both have a chance at more, but unfortunately for them, it will either be more or zero. That's a hard pill to swallow for many as it represents the majority (most likely the entirety) of their potential wealth.
As for the founders, they won't be thrilled if the company goes to zero, but they have almost surely received some liquidity during the Series B and/or in the secondary market. It's very conceivable that each founder has already taken home more than $10mm. Chump change compared to being a billionaire, but given that each is still too young to rent a car from most places, having enough money where if managed correctly you would never have to work again and be able to live a quality life in the highest tax bracket is by most people's standards not too shabby. If it goes to zero, the investors will lose some personal money, but it's a diminimus amount of their own net worth.
Part II. This Old Man And Snapchat.
Like many, I have been thinking more than I ever intended to about Snapchat in particular what it is about Snapchat (both the app itself and symbolically) that I have a problem with. Sure, it's easy to look at them and say if this doesn't signify a tech bubble than what does. It's also easy to comment on the inane "bro" culture or that such a uniquely unoriginal idea could be rewarded so greatly. All are valid (and maybe necessary for this idea to actually work), but they come off as the complaints of those who come in second (which in our binary world means first loser).
In a crazy idea, I figured to better understand Snapchat, I should join Snapchat - which felt creepy enough once I saw the hero image for the app store (pictured above). After less than a week, I now can better share what it is that actually bothers me… and it has nothing to do with the idea. It's that I'm not used to a product that I can't use being so valuable and beloved. That's the source of my personal dissonance.
Pinterest isn't designed for me, and it too has a multi-billion dollar valuation. But Pinterest has a cleaner valuation story. Unlike Snapchat which is a self-contained universe of eyeballs, Pinterest doesn't just have eyeballs, it has and continues to drive them to businesses. And when you sit in between users and businesses in a value add way, you get to charge a value added tax - Google being the most dominant.
My Snapchat issue is threefold. First, I don't know what to do on it. All the behaviors I've been trained on don't exist - no "liking," following (although the stories are coming close), or reposting. (I do appreciate the UI and the clever on boarding which helps solve for the empty room problem, though.)
I don't know what to do on it because I'm of the generation that still finds it amazing that I can take as many pictures as I want and keep them. I remember actually taking photos with cameras that required printing in order to see them. The truly digital generation couldn't comprehend such a scenario. I also don't know inherently what to do because I'm of the generation that in response to the closed nature of the generations before us, lives our lives publicly, perhaps too publicly.
Sexting aside, the most compelling argument I have heard for Snapchat involved the younger generation's desire to live in a connected world (which for them is just the world) but with some privacy. What teenager doesn't want privacy and a feeling of control over their life? For them, Snapchap is probably just chat.
If my first issue is what to do, my second is how. The issue isn't that the photos I send or receive disappear. It's that the only way to communicate right now is through photos. I don't know how to answer a photo with a photo. Maybe you don't actually answer, that the proper way to Snapchat is a bunch of one way communications. Snapchat does make it stupid simple to caption photos. When I see that, I think of memes, which are already the most popular forms of communication on Facebook. That Snapchat allows you to create your own is a smart move.
As for monetization, with Snapchat you have an inbox, so the criticism about the disappearing nature of the product becomes more philosophical than an actual business challenge to overcome. The inbox seems ready for a "native advertising" platform, but the easier money maker is probably to take the route that most Asian chat programs have - offering decals, stock photos, and a slew of ways to communicate in the current fashion but using ready to use options, i.e., sexy clipart. That would help those like me who feel the need to reply but don't necessarily have a photographic way to do so. (We do have the money too though…)
It's fair to say that we've figured out why Snapchat turned down Facebook's offer (it's about the money honey), why it appeals to kids, and that they can make money. My first two issues with it are age / behavior related more than anything. Even if I could solve for those, I still can't use it. Why? That's the third problem I have. Snapchat may just be a meme generator and a new interface to access the phone camera, but it still stands for bad behavior if you are not a kid.
If my wife saw Snapchat on my phone, what would she think? If I saw it on her phone, what would I think? Just looking at my contacts who also have Snapchat is revealing in its own way… and not one my wife would like. Thankfully, I have quite a few years until my kids might be using Snapchat (or its equivalent). I might understand them using it intellectually, but as-is, I'd be pretty tempted to install the Snapchat logger app just to make sure.
