Snapchat Said to Seek Up to $19B Value in Funding Round | Hacker News Reader

Snapchat Said to Seek Up to $19B Value in Funding Round

bloomberg.com

33 pointsbko51 comments

Generally speculative investments priced via proxy. Not sure if venture capital is much different but wall street types pay close attention to ratios. One of the important ratios is price to earnings, which is the dollar price you have to pay for a dollar of earnings. If the company doesn't have any earnings, you can look price to revenue. If no revenue, look at price to user acquired.

For instance, Facebook paid $28 per user [0]

The median cost across all the acquisitions was about $92 per user in 2012 [1]

I'm not sure about the number of users Snapchat but the article says that there are 700 MM snapchats sent daily. Assuming 700 MM users (almost certainly overestimated), the cost per user at ~$27. Snapchat is said to be the #3 social app among millennials though [2].

This is probably how they got to this number.

For proxy, Facebook makes about $2.81 revenue per worldwide user (US is higher at $9) with ~30% operating margin [3].

Would love to hear someone working in VC comment as to the rationale used.

[0] http://www.statista.com/statistics/222363/price-per-user-at-... [1] http://www.wired.com/2012/04/opinion-baio-instagram-trend/ [2] http://techcrunch.com/2014/08/11/snapchat-is-now-the-3-socia... [3] http://files.shareholder.com/downloads/AMDA-NJ5DZ/3988722759...

This article is talking about 100MM users back in August when it was valued at 10B.

http://mashable.com/2014/08/26/snapchat-10-billion-valuation...

I think you did a very good job describing the valuation process. In the absence of a PE ratio, folks fixate on $ value per user.

I'm not a VC, but I've seen a lot of valuations. Two caveats I would add:

1 - Investors will modify the amount based on growth. (300 million users at flat growth is worth less than 300 million users growing at 20% a quarter. This is the Twitter problem.)

2 - Investors will pay more for higher value users. Even if the path to monetization isn't obvious, high income users are worth more than low income users.

$ value per user makes sense but with viral growths there can be a viral decline in user base as well. To make it sustainable you need more than just an app which Facebook has. FB along with being an app is a site and a platform to log into any site you want and Snapchat is not.

All very true. The value per user is just an imperfect heuristic when other measures (such as cash flows) aren't available. It's also a decent (and still imperfect) measure for acquisition value, though it has the limits that you mentioned.

A $19B company created in 3 years without any revenue model from nothing by a college kid. This is bit shocking. This smells like a Ponzi scheme as the valuation keeps increasing over time even when there is no revenue generated. The losers in this scheme will be the last round of investor who will lose it all.

It's a bit terrifying.

There are enough real companies with real revenue outside of marketing that we can probably safely say this isn't complete repeat of the Dot Com Bubble.

But damn does it rhyme in some parts. Damn does it rhyme.

I don't think there is an overall sector-wide bubble today, but there may very well be isolated pockets and individual companies with bubbly Ponzi-like characteristics.

The late 90s was just insane. Basically you had hundreds of companies much airier than Snapchat, some without even a product. Some of them even went IPO like this. It was crazy. Today looks nothing like that.

If Snapchat is well run, it will use its current ability to raise capital to build or buy other assets that can generate revenue. For a mature company version of this, look at present-day Yahoo-- its core brand is almost dead but it owns a lot of other stuff. If it's not well run (or if the founders don't care) it'll eventually deflate and the latest stage investors will lose big.

SnapChat is starting to sell ad space. So I'm sure they'll generate hundreds of millions of dollars and end up being fine. A company that large doesn't just fail over night. Founders and early employees are set for life.

The real tragedy imo is that these companies are idolized by the valley hive mind. Smart, young developers seem to be more interested in building social-mobile-ad-generating-app-number-twomillion than work on something worthwhile.

Worthwhile being healthcare, education, space travel, energy, etc. Not some viral app that sells ads.

this is nowhere near the repeat of the Dot Com Bubble. It's WAY BIGGER, but played with VC money instead of public money. We've got several startups valued at over $10 Billion each. Back in dot com bubble, a billion dollar startup was a huge deal. These days a startup raises $50 million and no one blinks an eye.

No revenue model? No revenue perhaps, but they do have a revenue model through Discover and sponsored Our Stories

Making money through ads is probably the least creative way to do so. Also if ads become annoying people will switch to another app.

Snapchat doesn't have revenue, but it has a lot of _potential_ revenue in the form of users.

They are asking–and getting (allegedly)–$750K a day from big brands for ads.

Smells like revenue to me.

http://www.adweek.com/news/technology/snapchat-asks-brands-7...

The risk of loosing the users to another app in the future is not taken into account in this valuation. What if all the teens grow up and move on to another app and the new teens do not use Snapchat and use another app that goes viral?

And Snapchat's very design (no history) makes the app not very sticky. There is practically no switching cost.

Are brands paying though? I don't see any ads.

Does it matter if it’s a 5 y’o or 19 y’o?

Does it matter if its only 3 years old?

All that matters is the TAM and growth rate.

This is nothing like a Ponzi scheme, which is where new investments are used to pay off old investments, and investors are kept in the dark. Old investors get nothing additional from this kind of deal besides maybe a chance to liquidate a small portion of their shares at each round.

It also doesn't actually mean the company is worth $19B if you say, compare it to a public corporation. There's a huge difference. It's still a highly speculative investment, which is why they're not public. If Snapchat was to go public today, Wall Street would likely eat them alive. This just means that some venture capitalists can be convinced to buy something like 2.5% of the company for something like $475M.

You mean like Facebook?

EDIT: Facebook 2004 to 2009 for a $10B valuation, Snapchat 2011 to 2014 for the same valuation.

Snapchat did it in 4 years compared to FB and FB was a site/app/platform back then where you logged into a site using Facebook. This is not the same. It is just an app.

I'm not sure why revenue is relevant. No revenue doesn't imply an improper valuation nor a bubble. Those things might or might not be true, but if they are, it's not related to revenue.

Startup valuation is not determined in a vacuum. Don't ask how the company is going to serve its future self, ask how it's going to serve the free market that wants to own its assets (engaged users).

You think there aren't a ton of companies who wouldn't mind 200 million users? How they monetize them can be their own problem. Snapchat's value prop, at present, lies in the grip it has on the population. Rarely can a company just go out and buy that. They have to invest in products and services and will probably fail.

They may monetize it in the future, which would just be gravy. It's still incredibly valuable to a few companies who can afford it.

For context, that's a fleet of five space shuttles when adjusted for inflation. Somehow I have some doubts that a photosharing application with no revenue is actually worth five space shuttles.

Sure, they may have a lot of users, but so does the company that makes the paper I wipe my ass with.

> Sure, they may have a lot of users, but so does the company that makes the paper I wipe my ass with.

If you use Charmin to wipe your ass, they are owned by P&G, which has a market cap of $230B.

Procter and Gamble produces a whole lot more than toilet paper. They're one of the three or so megacorps that makes almost all of the consumer household goods sold in the US.

https://en.wikipedia.org/wiki/List_of_Procter_%26_Gamble_bra...

Comparing them to Amazon might be a bit more accurate.

EDIT: my napkin math turns out to have been closer to "toilet paper math" because it was completely wrong. See child comment for details.

Interestingly, Charmin as a brand has revenue around ~2.5B[1], which when multiplied by P&G's P/E ratio of ~25[2] gives you a rough idea of the brand's value as part of the parent company's market cap: 60B.

So, the paper you wipe your ass with is worth about 3 snapchats.

[1]: http://www.statista.com/statistics/188710/top-toilet-tissue-... [2]: https://www.google.com/finance?q=NYSE%3APG&ei=t77jVOC5DMeoiQ...

The E in P/E is earnings (profit), not revenue. Your valuation is probably an order of magnitude high. Also your first link uses the vague "sales" which could mean end retail sales, in which case revenue to P&G would be even lower.

There's no way Charmin is worth $60B.

Good point. Edited my comment to reflect it was bad math.

And if you use University of Phoenix diplomas to wipe your ass, they are owned by Apollo Education Group, Inc, which has a market cap of 2.83B.

Perhaps the market is in for equilibrium on the other side? Both Snapchat and toilet paper serve useful temporal utility, disappear almost immediately, and rarely contain anything but shit. Kimberly Clark (the maker of some of the most popular toilet paper brands) is currently worth $40bn according to the public markets.[1] Given that Snapchat is only worth $19bn, I wonder if perhaps Kimberly Clark is in for a deep correction.

[1]http://finance.yahoo.com/q?s=KMB

When you compare them to space shuttles, sure. But when you compare them with WhatsApps, it's actually somewhat reasonable to value them at around 1 WhatsApp.

I blame Zuckerberg for screwing up the WhatsApp to dollars exchange rate, not others for extrapolating. Given Facebook's previous attempts to purchase them, I can easily see them selling to Facebook for above that $19B valuation.

Once you remove Facebook from the equation, the valuation becomes just as absurd as you make it out to be.

Why? Snapchat provides utility to hundreds of millions of users. A space shuttle basically only benefits the astronauts on it, and the NASA engineers who get to pat themselves on the back. The so-called "science" they do is generally worthless.

Heh. I'm not sure space shuttles is the right unit of measurement. Five space shuttles doesn't sound like much at all.

But you could build about 25 Hoover Dams for 19 billion dollars...

I still find this VERY hard to believe. I could be wrong (and very well might be), but Snapchat still seems far more of a Groupon type of company than a Facebook.

We'll have to see how well they can deliver/scale Discover, but I remain unsure they can ever find a way to exit and become worth this amount with the types of users they have (very young, very unloyal to services, very difficult to monetize because of youth -- look at the ridiculous Snapcash product for instance -- requires a debit card/user to be 18, when 80% of Snapchat's audience is 13-17 and thus unable to use the feature).

I just don't know.

I know it's early but the stats from publishers on the discover feature are really good. Driving lots of traffic. It's weird they put that restriction on debit cards when pretty much all bank account holders regardless of age get one. A Google of 'debit card age' shows a box at the top of the page stating in the UK children as young as 11 receive them. However if kids start spending lots of money through Snapchat parents might start banning them from it - which would be more damaging to Snapchat long term.

To marketers, millennials are a very prized demographic. People generally build the habits they carry on into their lives at critical moments in their life. Those moments include going to college, having a child, marriage, etc. People embarking on this transformation are especially receptive to the marketing message (buy brand X diapers, drink brand Y beer, smoke brand Z cigarettes, etc). That's the thought at least

Groupon had US$ 3.195 billion in revenue for FY 2014, so no they are not groupon either.

Why is this story no longer on the front page of hacker news? Did YC get pressure from Snapchat employees or VC's?

Remember that this will almost certainly be Preferred stock, not Common stock.

That means that even if Snapchat sells for $1B tomorrow, everyone who invests at the $19B valuation still comes out positive.

Didn't Snapchat close a round 6 weeks ago for $500M @ $10B. How does this make any sense? Surely $500M buys enough runway to not need to do this.

Cashing people at at higher multiples.

This is always a possibility. Groupon being the poster child for that of course.

I'm guessing the logic is "if one can raise at 2x last year's insane value, why not." Perhaps the founders cashed out some too.

I don’t use Snapchat. Never really figured it out. But I hope Snapchat becomes the competitor that Facebook needs.

Props to the founders for not selling out.

Check out Snapchat Discover. It really doesn't have anything to do with instant messaging. It's more like headlines that you can dive into or move on from.

EDIT: Nevermind- it's in the app. Really dislike that web page, but since it's an app, who cares?

I'm certain that this is a stupid question- but is it snapchat.com? I went to that site and I see all black- probably flash or auto-start video or something.

Is there a deep link where there is a menu or something? I didn't see anything called discover on the front page.

Of course there is a bubble. The interest rate has been at zero for years.

First, an analogy.

In my very humble opinion the value of snapchat is set similarly to how the value of MySQL was set at $1 billion at acquisition by Sun seven years ago, a tremendous multiple, despite its being open-source at the time with next to no revenue. (Its revenues were something like $48 million, so Sun purchased it at 15-20 times earnings.) In the opinion of myself and others, the price was set by the value, to Oracle (the leading database company), of MySQL not doing an IPO as it had been planning shortly before[1], or Sun not competing with Oracle head-on. In fact, within 24 months of that acquisition, Oracle, a roughly $100 billion company[2] besieged by competition from open-source databases like MySQL and a flagging share price, itself completed an acquisition of Sun Microsystems for $7.4 billion. What are the chances that would have happened if Sun hadn't first paid $1 billion to own a direct threat to Oracle? According to one person, Larry Ellison often said, "It’s not enough to win—all others must fail." [3]

Basically, there is an elephant in the room setting the price of Snapchat. The price has nothing to do with revenues and everything to do with the elephant. The elephant is trading at a market cap of $211.61B. That elephant is Facebook.

Snapchat is worth $20 billion because Facebook is worth $211.61 billion and it's a direct threat.

It was about a year ago that Facebook paid $20 billion for Whatsapp[4], when FB was trading at less than it is today. (And in a move some viewed as desperate [4]).

$19 billion seems downright reasonable viewed in that context. What are the chances Facebook will pay more for it? Not low.

Snapchat is three and a half years old and has about 200 million monthly active users. This chart from around the time of the whatsapp acquisition is all you need to look at: http://slicecommunications.com/wp-content/uploads/2014/02/Wh...

Snapchat is a threat: http://www.businessinsider.com/snapchats-monthly-active-user...

And Facebook has the money and drive to make it bolster their own numbers instead. This is why it's worth $20 billion.

[1] http://www.bloomberg.com/bw/stories/2007-06-26/the-worth-of-...

[2] http://www.wolframalpha.com/input/?i=oracle+market+cap+Apr+2...

[3] http://steveblank.com/2014/09/25/watching-larry-ellison-beco... (apparently this quote appropriated from Gore Vidal though)

[4] http://www.cnbc.com/id/101432344

[5] http://www.cnbc.com/id/101429929

What a crazy world. Help my friends and I raise $500 million and we will build a cheap, modular and safe energy source that could end our oil addiction, poverty and drought in the third world and fuel a new wave of technological innovation based on nuclear engineering (transmutation). Or we can send funny pictures to our friends. I love these times.

False dichotomy. If you could actually deliver on that, you would have no problem getting 500 million.

Who says we can't? It's a risk game, you wouldn't know as soon as with SnapChat. Hence the low amount of investment in "real" ventures.

Reply on news.ycombinator.com