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05

Jul

What is behind Snapchat’s valuation? Networks.

Fortune’s Dan Primack wrote a post a few weeks ago asking, “what is behind Snapchat’s valuation?” in a recent round that pegged it at $800M pre-money. He was perplexed by the seeming lack of good, non-generic reasons for an investment from IVP.

I’m not surprised IVP didn’t precisely explain their reasoning – but it isn’t hard to figure out their logic.

Snapchat is worthwhile not because “we love LA” or because it’s “mobile first” (reasons 8 and 1, respectively offered by IVP’s Dennis Phelps). Snapchat is interesting for three principal reasons:

  1. It’s growing really, really, really fast
  2. It’s a new, different kind of communication
  3. Because of (2 + 1), it is or can become a powerful network and communications medium

That’s all you need! (1) would be enough for some – momentum VC! – but (2) provides a philosophical justification and (3) the economic one. Let me explain this reasoning a bit.

[1] It’s growing really, really, really fast

I won’t go into a lot of detail here – you can find public metrics to help support this, and see also Mary Meeker’s Internet Trends report from a few months ago which had good slides on Snapchat.

Key points: >100% Month/Month growth seen this year; more sharing users than Instagram; ever-growing share of total # of photos uploaded as well.

[2]  It’s a new, different kind of communication

Other photo sharing services are based on the premise of either (a) photo curation / memory preservation or (b) experience sharing. But  in all instances, photos are meant to preserve something.

Snapchat is ephemeral by nature and as such it enables photos to be used in ways they could not or were not used before. The medium is different and the constraints push people to interact in new ways. Snapchat is not the same as Facebook, or E-mail, or Texting, or whatever else.

[3] It is or can become a powerful network and communications medium

Because it has a large userbase with increasing penetration, Snapchat can easily end up in an Instagram-like position of having an accidental, but important, social network. At time of acquisition by FB, Instagram didn’t just have a killer ‘feature’ in the form of great photos and photo-sharing: it had a killer potential, in the form of its social networking functions and innate connections.

Because it is qualitatively different as a way to communicate, Snapchat can have the same features but have them be less immediately fungible. There can be platform lock-in. If you have a lot of people together, and you control how they communicate… that starts to look like a pretty good place to be, whether you’re a social network or another sort of provider. Manning the crossroads, you can usually find a way to collect a toll or otherwise cover your rent.

So what?

But that only explains why Snapchat is interesting, and why it might have some future platform to make money. It doesn’t really explain in any monetization logic how the present value of its future (etc.) is $800M today.

To do that, you have to use a bit of VC and Silicon Valley logic and pixie dust… its value is what the market will pay, and right now there are those who will pay reasonable well for a potent, sticky social network. The trick is to be able to make enough money on your own to choose your fate – whether to try to build a business or to accept a fair market premium from a hungry, behind-the-curve suitor.

Primack also missed the obvious market opportunity – reveal that Snapchat never deletes Snaps, and start a ‘premium Snapchat’ model where you have to pay to keep any blackmail-worthy shots from being revealed!

I don’t know that $800M is the right price for Snapchat, but if someone else wants to put money there, I’m interested to see where it leads. There are worse places on the investment continuum between Angry Birds for Dogs and ventures providing water filters to villages in Africa.

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