Snapchat and that old no revenues debate

Like many others in the field I was left scratching my head about Snapchat recently.  Not because of the reported $4 billion offer but because of the explosion of age-old arguments about how scandalous it is for a company with no revenues to be valued that highly.

I really thought we put that tedious debate to bed a while back, but I guess not.  Grown-up warnings about how real businesses have real revenues were yet again littering my twitter feed in recent weeks.  It's as if the last ten years of consumer innovation never happened.

Here's a selection:

  • "why do investors think a silly app with no clear revenue model is worth so much money?" says Meghan Neal at the Verge 
  • 'The approaches to Snapchat come amid rising exuberance for social media, and mobile-messaging upstarts in particular" says Evelyn Rusli of The Wall Street Journal
  • "Once your valuation is in the billions, there is no room left for friends or family to bail you out – only fools if you are lucky enough" says Alex Wilhem on Techcrunch
  • "Because this time, it's different. It always is, right? ;)" quips Chris Ciaccia for the Street


Be a student of recent history

Slamming zero revenue companies seems to happen every time a large, zero revenues company emerges.  

It was true at the time YouTube started out;  Google was ridiculed for the price it paid.  It was true when Facebook became successful; the lack of imagination of the pundits about the capacity of monetization for Facebook's data was stunning and the fact that the IPO was priced at a punchy level allowed these same know-it-alls to hit back with a vengeance.  "I told you so", they chanted, pointing to lackluster ad revenues and not realizing that we were just in the first innings of the juggernaut's monetization efforts.  It was true when Instagram was acquired, with heads nodding in disbelief that facebook would pay $1bn for 10 guys and an app.

A few years down the road, YouTube is clearly a phenomenal acquisition.  How would you like to be in the shoes of the company who paid under $2 billion for the world's largest media and music site ?  The 2% of dilution or so that facebook suffered on Instagram delivered them a large part of the answer to their biggest existential threat, their weakness in mobile.  Think that was worth 2%?  And please don't get me started on Twitter, long dismissed as nothing but a fad. 

Zero revenues as sound business strategy

If you're running a business that is predicated on tiny revenues per user (such as an advertising based revenue), it's common sense to realize that you need scale.  Humongous scale.  It's often entirely rational to shun revenues until you have achieved that scale.

You need scale for three reasons:

Revenue argument - if your business is a $3 CPM business, run the maths, you need a ton of users. That's pretty mechanical.

Relevancy argument - large advertisers need both scale and intent. Before you get Sprint or Ford interested in your app or site, you will need to make it onto media plans & emerge as a top media property in the segment that you are in, as well as deliver large relevant audiences to the advertiser. So there is no point in monetizing early.

Cost argument - Operationally your business gets way more efficient when you have ton of users sweating your tech platform.  If we take the case of the video sharing sites, they get MASSIVE economies of scale that are related to how much of their own traffic they can route through their own CDN.  It was the difference between life (DailyMotion) and death (Metacafe, Veoh).

Supporting yourself through the capital markets

If you want to build a sustainable business, you can take money from customers or from the capital markets (i.e. VC's).  The private markets are fairly patient, and it's perfectly acceptable to go into a VC meeting and say "we're wilfully ignoring revenues for the time being as we sustain ourselves through external capital injections".

Non linear value creation

I have sympathy with the fact that it's tough to get your head around a company moving form $100M to $1 billion in the space of months.  But before you dismiss that as crazy, consider the following : we have ample evidence that companies who achieve network effects scale at insane speed and tend to be extremely sustainable over time.  When that signal begins to emerge and a startup moves away from a crowded field and achieves escape velocity, valuations follow.  Of course these assets are extremely hard to price but the lofty valuations tend to reflect the size of the prize.  No irrationality here.

Inside a company with no revenues

I was a first round investor in DailyMotion.  We moved from 3 million to 45 million uniques a month in under 6 months, and at last count we had 200 million uniques.  We had over 60 competitors of which 5 had similar scale.  One of these competitors was called YouTube and benefited from a tight integration with a social network called MySapce.  So what did we do ?  We decided to completely de-prioritize revenues.  Scrapped it off the roadmap.   Why ?  Because it was simply not possible to survive that kind of ramp and continue to innovate on product and implement the tools of monetization at the same time.  Because we understood that if we could hold on to that #2 spot we had a business.  I cannot disclose numbers but let's just say that at last count we had well over $50M in revenues and were nicely profitable.  The strategy worked and arguably was the only strategy to success.  

Two words on snapchat

Right now the argument seems to be that only a fool would buy snapchat.  It's interesting to me that the immediate assumption when the public sees numbers they don't reconcile is that (a) we're in a bubble (b) fools must be involved.  I doubt that.

One of the biggest revenue grossing industries in the world is called mobile messaging.  The formats have not been fundamentally modified since SMS came onto the scene.  Twitter has a broadcast type follow model but it does not evolve the message itself.  Snapchat does just that in the core messaging market.

There are a ton of valid questions about sustainability of its social graph and its risk profile is certainly not for the faint of heart.  But new giants aren't build by being faint-hearted.  But don't let lack of imagination constrain your thinking.  What if Snapchat messages became permanent tomorrow, would you look at it differently ?  What if the user base sticks together but sees zero benefit to message permanence ?  Whoever said having a digital archive had to work for Snapchat because it works for Facebook ?  As for ad formats, don't tell me an exploding offer targeted at the right user group does not hold potential.

My bet is on intelligent founders and investors looking at usage and growth patterns and thinking rationally they don't want to sell out too early.  My bet is against pundits making pronouncements on the back of zero information and a sense of self righteousness and "sound business judgement".  The future does not look like the past.

Skype was probably wrong to sell when it did.  It could have reinvented telephony.  I'm not holding a crystal ball, but one of these messaging startups is going to nail telco to their cross.  I just wish I knew which one.

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22 Responses to Snapchat and that old no revenues debate

  1. Well written.

    If you were trying to put a price on SnapChat, how much would that be a function of projected user growth and some expected CPM (basically extrapolating), vs an option value on that they might the one to “nail telcos to their cross”? Or something else in that equation?

  2. +1, and they have the potential to become a protocol and part of the internet’s plumbing.

    • Brian Karas says:

      What company has become an actual protocol in the last decade+?

      Not Twitter. Not Facebook. Not Skype.
      IMO, nobody is trying to create plumbing, there is not much investor enthusiasm in that, and it’s akin to the “dumb pipe” problem ISPs face. People want to *control* facets of the Internet, not enable a control mechanism for others.

      This is a comment I posted on an FB group where we were discussing the whole SnapChat thing:

      A few thoughts, in no particular order.
      1) Facebook seems effectively “dead” to me. The value has diminished, the timeline auto-organization sucks and it’s just generally not feeling fun and hip anymore. FWIW, I don’t think there is likely to be a long-term “dominant” social network for quite a long long while. We’ll go through many iterations of “top” social network.

      2) The desktop is dead for social networking in general. I didn’t fully realize this until recently. *I’m* on my laptop all day, so webapps seem normal to me, but as I’ve been researching something for [redacted], I realize how many people use their phones, especially Android users (it seems) as their primary web interface these days. I have friends that own desktop-style computers that hardly ever get used, everything is done on a mobile, and with a service-specifc app (tumblr, facebook, twitter, etc.)

      3) Advertising-supported revenue streams also feel dead to me. They might work for the next few years, but I think someone is going to crack the subscription model shortly in the sense of being able to justify charging $10 or $20/mo for a core social network service. I remember when home Internet subscriptions were an oddity or a luxury, and now the Internet is a utility, like your power or water bill. Internet subscriptions have chewed money away from phone and cable. I also see the mobile carriers working to provide a new billing platform, I’m working with Verizon on something related to the security industry, but they’d be just as happy to bill for some other service.

      4) So, if you generally agree with the above, SOMETHING is going to replace Facebook, and it’s going to be a mobile-app-centric social networking tool for the next Internet generation. Personally, I don’t think Snapchat is “it”, at least not without some major pivots, you need something that maintains threads and historical data to a degree. BUT, I could see how the Snapchat guys could spin their platform as a probably contender of sorts. If they want to change the world, it made sense for them to pass on this sale (maybe, see comment below).

      5) If I were the Snapchat guys and I wanted to change the world, I’d cash out of SC with as much money as possible and use those funds to build The Next Thing, on my own terms and on my own timeline. You’d have the reputation of a successful exist, experience, and cash, you’d be pretty golden, IMO.

      Just my thoughts, feel free to call me a lunatic.

    • just like bitcoin ;-o
      “protocol is the new platform”

      appreciate well fred’s perspective, financing methodology enabled ‘ramp for revenue’, deep financing the scuba for holding your breath underwater, andreessen makes a further interesting point in the @saracuda convo starting approx 37:00

      The future does not look like the past.

  3. 100% agree with your take. It’s what they can do with those users that matters now, whether it’s advertising or another bifurcation on the business model.

    btw- what do you think about monetizing mobile search (in-app vs. google deep linking), re: your last line.

  4. Emmy Valenstein says:

    you can’t compare youtube and snapchat. SC is basically a unique messenger app or function like imessage or AIM. remember AIM that was hugely popular in the 90s and 00’s? No one uses it now. YouTube is on another level.

  5. Scott says:

    I still would have taken the $4B. Personal preference. I could guarantee generational wealth for myself & my 30 employees. There is risk in waiting or in the public markets. A war could start, California could quake, inflation could hit fast … I’m a bird in hand guy.

  6. Ben Carcio says:

    Agree mostly Fred, but for some business models revenue is THE score. When selling to the enterprise you’re positioned within the company by the percentage your take from the budget. If we were free to GM, we would would not get the legal/finance/IT scrutiny required to build a sticky enterprise relationship. But, by getting them to take from a budget we access a whole difference part of the decision making process and thus can prove a better product market fit.

  7. Mathieu Gosselin says:

    I think it totally depends on the quality of the team indeed. Their future is about all the little decisions they will take.

  8. azeemazhar says:


    Everyone gets that argument. And I think we know that if Snapchat can maintain its growth and some modicum of user loyalty, it’ll be able to do well – i wrote about this here:

    One question I have – and I am not close enough to the data – is whether Snapchat’s cohort will leave fast. Will SnapChat be a place we spend some part of our early 20s (and by no means all), and will that be enough to build a sustained business?

  9. crumbler says:

    Correction — Meghan Neal writes for Vice, not The Verge.

  10. TeliApp says:

    I too wished I knew which one.

    I agree where Scott is coming from; the ability to guarantee success for myself, family and my employees – who all joined my company when we were just a bunch of guys meeting at Panera Bread every day – is most likely something I would not have been able to turn down at the $4B level. Additionally, accepting a favorable offer such as that one would enable me to “do right” by angel and vc investors, who are all looking for a successful exit.

    What does it say about a management team that turns down the “offer of the century”? I would hope that the offer was rejected because of information that we (the public) just don’t have. Maybe there’s a better deal around the corner that we don’t know about. Maybe there’s a feature they’re about to release that will make them even more attractive for purchase.

    One of my teenage beta testers said that she sends at least 20 snapchats a day. When I asked her, “how many of them are racy photos you’re sending to your boyfriend?” she responded, “not that many [smile, giggle, laugh laugh], i just get bored of texting so i use snapchat instead.” so if she’s telling the truth, and if it’s true that a large group of teenage girls also have similar behaviors, and a whole other bunch of market variables align correctly, then there’s a ton of room for expansion in the alternate chat apps market and perhaps even some additional standard that hasn’t yet presented itself.

    But still…. $4B? It wouldn’t be an easy thing to walk away from that :)

    Josh Weiss, CEO

    • Justin says:

      Maybe they wanted to build a business instead of selling out… I mean ‘looking for a successful exit’. If you wanted to “Do Right” you would have paid for the work that you received from kids who didn’t know better than to work for free to try to break into the business. You don’t know anything about what makes a mobile app successful. Your spamming tactics on twitter are disgusting and your expectations of interns to spam all their Facebook friends shows that you are out of touch. I’m embarrassed that I spent three months working for you. I thought I would receive guidance and help with issues instead of being instructed to check Stack Overflow. I would have been better off spending those three months teaching myself how to program. Your full of shit. I will follow you wherever you go and make sure that people know what are you about..

  11. Michael Thomas says:

    Awesome analysis!

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  13. Tom says:

    Zero revenue is not a fatal flaw if it’s easy to see where the money could come from. It’s not hard in the case of YouTube or Skype, but Snapchat? It’s about the worst platform ever to get money from Advertisers.

    You honestly think for the first time ever in history Teen’s will stick to a fad, wasn’t long ago we were all talking about Chat Roulette or Angry Birds, Or the Second Life, or Fruit Ninja…. SnapChat will be dead in less than 2 months, passed over by teens as a newer, better, shinier, trendier, edgier things come along.

    In NYC even Vine is boring and Tinder got boring after 3 months, it will spread to the world and seem to grow, but the core soon moves on.

  14. NJR says:

    What’s actually happening, is that unable to make the numbers stack up in the real business world, social media companies have invented a virtual business world where 2+2 never has to make 4.
    And at the moment, nobody wants to point out the emporer is naked, because they will be accused of ‘not understanding’ the New business models.
    The reality is, that thinking you can monotise everyone via advertising, is going back to the day’s when websites were valued on how many clicks they got – and remind me, what happened to that way of valuing websites?

  15. The issue is that Facebook’s model requires them to acquire companies like Snapchat for what Snapchat provides, and which is why they are making such large offers. If they could continue to purchase them, then Facebook could become the dominant (or even only) player for the foreseeable future – however, when a company, like Snapchat, decides they will go it on their own or perhaps sell to someone else in the future, then the model breaks and the ecosystem deflates.

    Facebook’s model is broken, or rather, it’s the wrong model.

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