What is behind Snapchat’s $800 million valuation?

What is behind Snapchat’s massive valuation?

By Dan Primack June 24, 2013: 1:25 PM ET

Venture capitalists have valued Snapchat at more than $800 million. Why?

FORTUNE — Snapchat is one of the world’s fastest-growing mobile apps, with users sharing more than 200 million “snaps” per day. For the uninitiated (or those over 30), “snaps” are instant messages/photos that self-destruct ten seconds or less after being viewed.

It also has one of the mobile world’s fastest-growing valuations, with multiple reports out today that the company has raised $60 million in new VC funding at an $800 million pre-money valuation (the company confirmed the deal, sans financial specifics).

What Snapchat doesn’t have yet, however, is revenue. Nor does it have easily identifiable paths to revenue.Traditional mobile advertising would seem to be a no-go, given how quickly snaps disappear. There may be some residual recall value like with television ads, although it’s tough to compare a 10-second view when the user is focused on something else (i.e., the snap’s content) to a 30-second spot where the user only has one thing to watch on the screen. Much of the data also seems fleeting, compared with information collected by such companies as Pinterest and Tumblr. And, speaking of Tumblr, it was acquired by Yahoo (YHOO) at a valuation just 25% or so higher than this round. That would be a decent return for late-stage investors like IVP, but hardly spectacular.

So is this valuation based solely on massive usage/growth, and the belief that someone like Yahoo (YHOO) will be desperate for it as a feature? That doesn’t make sense to me either, given that Tumblr sold for just 25% more than the post-money. Snapchat always could introduce some sort of subscription model — or make unlimited snaps a premium service — but that could eat a bit into the growth and enable cannibalization by a rival service.

Or maybe the snap service is really just a Trojan horse, securing users while the company polishes up what could become the de facto mobile camera app.

One person who should know the answer is Dennis Phelps of Institutional Venture Partners, which led the new financing round. Unfortunately, he isn’t doing interviews on the deal. Instead, he wrote a blog post titled Ten Reasons Why IVP Invested in Snapchat. It left me with two thoughts:

1. Either Phelps is a lousy venture capitalist who doesn’t know what he’s doing, or

2. He knows exactly what he’s doing, and has expertly talked around telling readers of the blog post.

My guess is the latter.

Seriously, many of the reasons Phelps gives are generic enough that they could apply to dozens of startups, if not to hundreds. Mobile-first? Focused on imagery rather than text? The founders are digital natives? The company is based in Southern California?

And some of them just aren’t good reasons to invest. Namely the ones about following smart Series A investors (Benchmark and Lightspeed) and the one about “because they let us.”

So that’s why I come back to the idea that Snapchat has a grand plan that neither it, nor its investors, are willing to divulge. Yet. Not even in a 10-second message that self-destructs.

June 24, 2013 6:47 pm

Snapchat valuation hits $800m in funding round

By Tim Bradshaw in San Francisco

Snapchat, the photo-sharing app that has become hugely popular with teenagers over the past year, has completed a new round of funding that values the Los Angeles-based start-up at around $800m.

Launched in September 2011, Snapchat allows smartphone users to share photos and videos that disappear after 10 seconds or less.

At a time when people are becoming more aware of the trail of personal data they leave behind them on social networks such as Facebook, Snapchat has achieved instant success by being light-hearted and ephemeral.

Now, more than 200m images are shared every day, Snapchat’s chief executive Evan Spiegel said in a blog post on Monday, up from 60m in February.

Mr Spiegel said he and co-founder Bobby Murphy, who are both in their early 20s, created Snapchat because they wanted a more “personal” and “fun” way to communicate. The service now has millions of users and is shaking off a reputation as a platform for sharing sexy or lewd photos.

Although Snapchat is yet to prove its business model can achieve greater permanence than its images, its valuation has increased in line with its skyrocketing usage.

Snapchat has raised $60m in new funding from Institutional Venture Partners, General Catalyst Partners and SV Angel, on top of a $13.5m round announced in February, led by Benchmark Capital and Lightspeed Venture Partners.

According to a source familiar with the terms, the round values Snapchat at about $800m, more than the $715m Facebook paid in cash and stock to acquire Instagram when that deal closed less than a year ago. That valuation was increased by very competitive financing that also saw interest from more traditional Wall Street investors, the source said.

“Snapchat has joined the relatively small number of companies that can be used as a verb,” said Jeremy Liew of Lightspeed.

Investors argue Snapchat has many potential revenue streams, from advertising to buying virtual items. It offers one-to-one communications as well as the ability to broadcast to many people simultaneously.

However, its pace of growth, and accompanying increase in costs per user, means Snapchat may soon need to find a source of revenue to cover its expenses, in addition to the funding.

“We’ve been able to support the growth of Snapchat with minimal overhead,” Mr Spiegel wrote on Monday. “But in order to continue scaling while developing the Snapchat experience, we needed to build a bigger engineering team and figure out how to pay our server bills.”

Snapchat will have to tread carefully as it moves towards monetisation so as not to upset its users or impair how they use the simple app.

Dennis Phelps, general partner at IVP, said in a blog post that the deal marked a rare bet for the late-stage investor on a company that has “yet to turn on its monetisation engine” but was nonetheless “one of the most competitive financings we have been a part of in years”.

Comparing Snapchat’s “hyper-growth” rate to Twitter and Instagram, Mr Phelps said he was attracted to a young, “mobile first” team and an app that showed strong network effects, beyond its early adopter base of teenagers.

“Snapchat is clearly a huge success, and we wouldn’t have invested unless we believed that it will become a much larger one,” he said, noting that the founders aspire to make it a “multibillion-dollar” company.

Jonathan Teo, managing director at General Catalyst, said the firm was “very privileged” to be working with Snapchat. “The growth is unprecedented in my experience in terms of the companies I’ve seen in the consumer space,” he said. “We expect this round of funding will help the company accelerate its growth.”

At the same time as announcing the funding, Snapchat said that Michael Lynton, chief executive of Sony Corp US and Sony Pictures Entertainment, will join its board. Snapchat has just 17 employees and will put “almost all” the new funds towards hiring and scaling its infrastructure, Mr Spiegel told tech news site AllThingsD.

Although he said that Snapchat could generate income from in-app transactions, similar to the model used by Tencent in Asia, as well as “native” advertising, Mr Spiegel said generating revenue was a priority for the “medium term, not short term”.

In its short life, Snapchat has seen off competition from Facebook, which copied its disappearing-messaging model with mobile app Poke earlier in the year, but failed to achieve significant popularity.

Snapchat threatens to steal social media users’ attention away from Facebook and Twitter, which are investing heavily in their own photo and video apps, Instagram and Vine. Instagram last week added short-form video sharing, akin to Twitter’s Vine. According to a recent presentation by Kleiner Perkins Caufield & Byers, more images are now shared privately on Snapchat than publicly on Instagram every month.

Other messaging apps are also booming as smartphone penetration increases. WhatsApp Messenger, based in Silicon Valley, said last week that it has 250m active users.