On valuations - Snapchat at $3 billion, and more

Are we back in the tulip days of the Internet? I lived through it in Silicon Valley from the years 2000-2003 (the best years for humility-inducing training for a tech entrepreneur and investor, in my opinion). Facebook at a $113.5 billion market cap (well above their IPO price, BTW)? Twitter at a $22.3 billion market cap as a newly public company? Snapchat at a $3 billion private valuation with only around 30 employees? There is no doubt that we have had major valuation movements recently, including Google now being worth $344.7 billion - to put that in context, Walmart is ranked #1 on the Fortune 500 and is worth $259.9 billion. Apple remains the world's most valuable company at $467.7 billion, with Exxon Mobil in second position at $415 billion and ranked #2 on the Fortune 500. Tech is clearly beating the old world as the world's most valuable companies. But Snapchat, a company with no revenue, at a $3 billion private valuation? When valuations soar like this, I think it is time to pause and ask some questions.

To answer this question (my own thesis is at the very end of this post), I turned to people that I really respect. My friends - on Facebook (how antiquated, I can hear the teenagers saying now). First, I started with this question on Nov. 6:

If Tencent invests $200m in Snapchat, it will value it at $4b - and Snapchat has no revenue. Is this insane or smart?

This caused a very telling and in-depth dialog. Since Facebook doesn't archive well, I believe it is important to retell it here so that I can easily refer back to it and hopefully you will enjoy it too:

Matt Hartley (founder of Winestore - my favorite online retailer for wine - and the first investor in Coremetrics, the company I founded prior to Bazaarvoice),

New Paradigm!http://static4.businessinsider.com/image/4dfbc554cadcbb8f03060000/are-you-the-fool-at-the-table.jpg

Erik McMillan (founder and CEO of Shelfbucks and founder and Chairman of Best Fit Mobile),

Depends on if Facebook buys them for $4B+. Long shot and it seems like a bubble to me. Who wants their kids using it anyway? No one.

Adam Zeplain (involved in many charitable causes and Sales Director at Bazaarvoice),



I would say it most depends on how they achieve revenue over time. Google's acquisition of YouTube seemed foolish at the time, but it turned out to be brilliant. Facebook bought Instagram for 1% of their stock and I would say that was very smart as many kids are never opting in to Facebook and staying on Instagram instead. Only time will tell. How to monetize Snapchat is not obvious to me.

Erik McMillan,

SnapAds? Awesome deals that self destruct unless you buy them quickly. While the Mission Impossible music plays.


Carl Shepherd (co-founder and Chief Strategy and Development Officer for HomeAway),

Erik, the entire point of Snapchat for kids is that parents don't want them to use it; and it's why it's going to work. At least for awhile. My 20 somethings are almost totally off FB these days....and my 16 year old hasn't checked his page in weeks because none of his friends are posting anything. So yeah, I'd say Snapchat needs to make hay whilst they can.

Ethan Holland (Senior Director of Marketing at American Eagle Outfitters and long-time idea guy in our Shop.org community),

Take a good idea, give it away for free. Get a user base. Get lots of money on promise. Insert advertising. Lose the users. Cash out. Start a new site... give it away for free.... get a user base. Repeat.

YouTube makes a lot of sense, Brett as a counterpoint. Great point. Not sure as much re SnapChat or Instagram (other than as a Trojan horse into the Twitter-ecosystem). Poor Hipstamatic... you had it all right there! Not sure how Instagram beat them.

GetGlue was just bought as well. So was Miso. That is where I would be focusing, if I was an investor.

Kent Zimmerman (VP of eCommerce at Shoe Carnival and a long-time pioneer in the Shop.org community),

If Snapchat can take advantage of their growing popularity with teens and tweens in the form of an exit anywhere remotely close to that valuation, then it's definitely smart. I think their allure is more than just the fact that parents can't snoop on their activity (although there is something to that). These kids are getting wiser about the social "footprint" that they leave behind on Facebook and even twitter, and for the most part they would rather not leave one at all. This is certainly what I'm seeing with my kids.

Carl Shepherd,

Kent's point is a good one; I can only hope he's right. To my great despair, I find in talking to melinials that they have accepted totally that their lives are public and it doesn't bother them. Of course, none of them have had their identity stolen yet, none of them have been defrauded, etc. but it amazes me that my older children (28/23) an the average young person here at my company simply don't care about the whole NSA thing: to them, it's just the way it is. The sun shines, the grass is green, and one has no expectation of privacy any longer.

Ethan Holland,

Kids Love Snapchat Because They See Facebook Like Adults See LinkedIn (link)


The irony is that we are all having this conversation on ... Facebook. I guess that means we are old. :)

Joah Spearman (co-founder and CEO of Localeur and a former Bazaarvoice manager),

Of course it's smart. I think SnapChat has 30 million users in the US right now and I'd guess it'll be 50 million by this time next year (and that's being conservative honestly). If Facebook could spend $4bn to get 30 million users automatically right now or 50 million in a year, that'd be around $80-133 per user. That's a very high cost, but if Facebook is trading at close to 12X revenue, that means its actually closer to $7-12 per user acquired. If FB's revenue per user is something like $1.70 right (before you add what they're going to make on Instagram ads or potential SnapChat ads) then what you're looking at is a potential return on investment within 5 to 7 years which is actually pretty much in line with what institutional investors should expect.


Joah, you raise a great point and that may indeed be what Tencent is betting on - an acquisition. Right now the high multiples of Facebook, based on the future thesis of their business, versus Google are what is making Snapchat's $4 billion valuation possible. Oh, and that of Twitter going public this week and upsizing their IPO price to potentially be worth $25 billion after the first day of trading - for a company that has done $422m in revenue for the first nine months of this year. You can do the math on the multiples versus Google, which is at much, much higher scale and with a very repeatable and working business model. You could actually say that Google made ALL of this possible with their IPO and public performance ever since. Investors are continuing to bet on that scenario and will take more multiple risk to hopefully have it play out a similar way. But I think the days are gone where investors are thinking that Facebook will put Google out of business (or even hurt them in any material way), or Twitter for that matter.


It's the Google model + the Twitter multiples + the Instagram acquisition + the Facebook revenue jump from $0 to $3bn in mobile revenue in two years.


For the record, the market is betting on Facebook in this way - their revenue multiple (to market cap) is 600% higher than Google's. Said another way, Google's multiple is ~6x and Facebook's is ~24x. That is a tremendous amount of future belief. The market may be right… we'll know 5-10 years from now.

Joel Kremer (former Sales Director for Bazaarvoice Amsterdam),

interesting discussion, although I personally don't believe the investment/valuation is warranted at all...on a sidenote: I'd love to know what the adoption rate is of snapchat outside of the US (a huge factor for Google, Facebook & Twitter)


If you're Tencent you don't invest in SnapChat on its international potential I don't think. I think you invest on the belief (and proof based on retail and ad spend) that US consumers are the most valuable to influence therefore the ones advertisers care most about. Waze, on the other hand, was acquired for $1.1bn because of its Asian presence I believe.

Steve atx (founder and CEO of Firefly LED Lighting),

depends on your warrants

Kent Zimmerman,

Just saw this article and was reminded of your post! Snapchat Spurned $3 Billion Acquisition Offer from Facebook (link)

Erik McMillan,

Kent, you beat me to it!

Garrett Eastham (co-founder and CEO of Compare Metrics),

Users != Customers, and I believe that rationalizing any other way puts the market at risk. I believe that the backers for SnapChat are taking a huge, unwarranted risk and that for the sake of both current and future stakeholders (equity holding employees in particular) that they find some way to make some amount of material revenue.

Joah Spearman,

I think users = customers is much more deeply rooted in enterprise/B2B and online retail than social so not sure it applies to Snapchat. Case in point, Facebook reached close to a billion users long before it figured out mobile revenue but it doesn't mean they've turned all those users into customers as much as it means they've just figured out how to extend the user behavior to monetize it through advertisers. The companies that pay Facebook end up being the customers, not the actual users who never get that bill from Facebook for $1.72 a year or whatever FB makes on each user. Same with Instagram. The customers aren't people like us who saw the Michael Kors ad through the articles the next day. The customer is Michael Kors (which is precisely why they started with a retail/fashion brand) because they were probably trying to figure out a brand/customer that gave them the biggest TAM immediately...thus retail. That being said, I don't think Snapchat has to make money in the short term necessarily to justify anything. It's the threat of a revenue model that works for them this early in their life, especially if you consider FB the best potential acquirer even if the price goes up to something like $5bn or $6bn. And having FB just proven you can go from $0 to $3bn in mobile revenue in 2 fiscal years if you have the user base, Snapchat can claim the same when they talk to investors as what FB said in FY11 when they were still guessing/hoping/praying mobile revenue would come. Here are a couple applications of revenue models for Snapchat. 1) They partner with a musician, say Jay-Z, and get 100 tickets to every one of his concerts in 2014 and - thanks to geo-location - send a Snapchat at the start of the tour giving away those tickets to whomever in the respective city tweets back the hashtag (sent through the chat) first. The Jay-Z tour could literally get tens of thousands of tweets with a hashtag in seconds and it would generate even more buzz for an already buzzy live music event, but in each city he has a show. 2) Snapchat could partner with Hallmark to allow young males to make customer Snapchat Valentine's Day cards that go to their teenaged / collegey girlfriends, and Hallmark (not the guys) could pay Snapchat millions for this. Just some ideas.


Great points and ideas, Joah. Time will tell on this one. There are many examples of companies that got a lot of "users", such as MySpace, Friendster, Geocities, etc. that you don't hear about a lot today.

Jonathan Van (U.T. student, entrepreneur, and serves on my team in the Office of the Entrepreneur-in-Residence there),

Quote from my friend and avid user: "If FB acquired Snapchat I would immediately stop using it. FB archives everything!" - while not completely true, that's the sentiment from an avid user.

Joah Spearman,

MySpace had a $600mm exit, which I think is equivalent to a $1bn to $2bn exit in social these days so not bad. Good money, but they sold to the wrong company. Also, it became the LA launching place (much like Trilogy and BV in Austin recently) for entrepreneurs. One of our competitors, GoGoBot, was started by a MySpace alum and there are others. (link)


Good point on MySpace… their timing on that exit was good but their horrible user experience eventually brought them down compared to the "cleanness" of Facebook

Joah Spearman,

And MySpace is actually an example of a company that didn't nail down who their customer was.



Joah Spearman,

What would be great is if we could port conversations like these into blogs or a place where various points could be hyperlinked and referenced in the future to articles, blogs, comments, etc.


I may port this one to my blog

Jonathan Van,

^I just had this conversation with folks last night - will post this idea for folks to pursue on HackTX


Great idea, Jonathan!! [Note: someone needs to run with this idea, all of this cutting and pasting is making me tired!]

Later, I posted this news on Facebook on Nov. 15, which I personally believed to be a pretty good explanation of the valuation (more on that at the end of this post):

Why Facebook would offer to pay $3 billion for Snapchat:http://www.businessinsider.com/why-facebook-was-willing-to-pay-3-billion-for-snapchat-2013-11

Erik McMillan,

Well spoken. I agree with his conclusions. Snapchat is cooler than Facebook for many users and mark needs to protect the core heart of Facebook...his social graph.

Alan Knitowski (founder and CEO of Phunware),

Snapchat founders are complete fools. Too young to realize what fools they actually are. $3B to prove nothing. Ring the register. Don't be an Andrew Mason or a Yahoo founder. Doh!

Then on Nov. 19, I posted this chart on Facebook about Snapchat supposedly having more photos uploaded per day than Facebook. This fostered another telling dialog:

Srini Kadamati (student at U.T. Austin),

what could be an interesting study is seeing on average how much time people spent on a photo on FB vs Snapchat


As you know, the photos disappear on Snapchat after 10 seconds - so Facebook would win, big time

Andrew Busey (founder of Challenge Games, acquired by Zynga, as well as Pluck, acquired by Demand Media),

Debunked: http://blogs.wsj.com/digits/2013/11/19/snapchat-users-upload-more-photos-than-facebook-not-so-fast/

Keith Henning (founder head of development at Coremetrics),

Brett, I don't understand how the investors let SnapChat turn down the Facebook offer. There doesn't seem to be much long term value here.

Andrew Busey,

  1. The investors don't have control. 2. I almost certain the investors encouraged them to say no.


Why #2, Andrew?

Andrew Busey,

I know the Benchmark guys. Also: http://www.businessinsider.com/how-snapchat-will-make-money-2013-11

Keith Henning,

So basically, they think they can eventually monetize their users around $500m a year or more. Users who are in the most fickle of all tech user bases. And that they can stay relevant long enough to do this in one of the fastest changing tech markets: mobile? I like a gutsy gamble as much as the next man, ask Brett, but in the end it is a currently popular mobile chat app with a user base that isn't loyal to anything. All their users could abandon them for an app that lets you send your friends virtual fortune cookies, for instance. I understand that they want to build api's that let the fortune company people send them from within SnapChat, but really, the barriers to entry to any good app here are so low that anything could and, likely, will happen to knock them out of the running as the next mobile app platform.

Andrew Busey,

I am very familiar with this particular market and I think that it is not impossible. However, not enough is publicly known about their userbase. If they have a small group of very active senders and a smaller audience of receivers or limited groups of people are just using it for private off the grid conversations, they are in trouble. If there are a bunch of active groups using it, they probably have a chance. I believe monetizing a userbase at roughly their scale for $500mm is not going to be that hard. However, I would also argue that Gurley's Law is not necessarily true right now and companies are still being valued on users and growth - which is dangerous. It is too easy to hit a growth wall and stall out - ala Zynga. Then it is difficult to recover.

So there you have it. A long dialog, but a very telling one. And a lot of very smart people weighing in. And to think all of this happened, around the world, and virtually. The world is flat indeed. Reading this blog post is like listening into a cocktail-party conversation.

My thesis: Snapchat is worth $3 billion, Twitter is worth $22.3 billion, and Facebook is worth $113.5 billion simply because Google is worth $344.7 billion. Google didn't have a business model for years. They obsessively focused on creating the world's 13th search engine and making it the best for users. Then Goto.com, which turned into Overture, created a business model for them - the world's best real-time "Yellow Pages", always bidding up and always looking to rapidly find the maximum yield on the supply and demand curve (instead of printing the physical Yellow Pages just once per year, giving only one opportunity to get the bid right).

Google proved that if you acquire enough users, then you can become one of the world's most valuable and profitable businesses. The Snapchat, Twitter, and Facebook bet is that they can do the same. Only time with tell. Snapchat at a $3 billion valuation will look like a steal if they can become as valuable as Facebook, which is worth 3,783% more today (and remember that it was just a few years ago when Facebook was worth $3 billion themselves). I doubt Snapchat will ever be that valuable, but that is the bet. If investors like Tencent and Benchmark Capital are right, then the payoff will be massive. If they are wrong, then the Snapchat founders will suffer the most, like Alan Knitowski pointed out above - because they could have sold the company for $100 million per team member - with no revenue - and after only being in business for a few years.