Snapchat Is Mulling Another Huge Round at a $3.5 Billion Valuation

"You can send naughty pictures to people and they cant save them."

Neither Snapchat nor Instagram are creating new traffic. What they are doing is essentially stealing marketshare and user engagement from competing services like Facebook and Twitter.

Their valuation isn't their revenue potential, it's the opportunity cost to Facebook, Twitter, et al for letting them survive.

If Snapchat is stealing $1bn of monetizable traffic from Facebook, Facebook would be wised to pay some amount of money (<$1bn) to either shut it down or bring them into the fold.

There is some extra valuation here in fucking your competitor over. Acquisition of hot social media companies like this is equal parts adding monetizable traffic to your network (traffic they may have taken from you in the first place...), as well as denying your competitors the ability to do the same.

So, say if Twitter acquires Snapchat, their valuation will be some combination of ${traffic_twitter_loses_to_snapchat} + ${traffic_facebook_loses_to_snapchat} + ${value_in_denying_facebook_access_to_this_traffic}

Whether or not that's worth $3.5bn is questionable, but there is some reason behind valuing non-revenue-generating products with a positive valuation.

The main "bubble" part here is whether or not this is at all sustainable (IMO, probably not). It's pretty easy to create something that steals an appreciable amount of traffic from the incumbent social network behemoths. At these valuations the cost to "recover" these eyeballs far exceeds how much the traffic is actually worth in ad revenue.

If you want to change the world in a more serious way, SnapChat's valuation should have as much of an impact on your determination as Coca-Cola's.

It's fun to look at celebrity tech culture (just like it is to read the covers of the trashy mags at the checkout counters at your grocery store). Just because we see news like this doesn't mean that important, interesting, valuable work that helps people isn't being done somewhere else.

  xyzzy:~ harryh$ host www.snapchat.com
  www.snapchat.com is an alias for ghs.google.com.
  ghs.google.com is an alias for ghs.l.google.com.
  ghs.l.google.com has address 74.125.29.121
  ghs.l.google.com has IPv6 address 2607:f8b0:400d:c04::79

A common term is "1x liquidation preference" which is the example you give -- if I put in $1M, I get $1M out before anyone else gets paid, even if the sale valuation is less than the valuation at which I invested.

Sometimes you see 2x or 3x liquidation preference, in which investors get that level of return before other shareholders get paid. This is considered "less common-friendly" and is a worse term if you are a founder or employee.

There are also other variations on this general idea that you see particularly when valuations get high.

So, in a case like the purported Snapchat round, a new investor would actually look at the investment as a combination of financial instruments -- think of it as a call option (participate in appreciation above the entry price) coupled with a put option (get your money out if the company sells at least for more than the amount of invested capital).

The more money involved, the more complex this gets and the harder it is to evaluate the true pros and cons of the investment based on public reporting.