Don’t let the price tag fool you: Snapchat isn’t a late stage company
Snapchat has secured commitments from Kleiner Perkins and at least one strategic investor toward its next funding round, according a report by the Wall Street Journal today. Long-rumored to be in excess of $10 billion, the Journal describes the company’s new valuation as “close to” that figure. The round, we’re told has not yet closed.
What’s interesting is the makeup of the investors in this round. At $10 billion, Snapchat is already in rarified air among private technology companies, even in today’s heady times. But unlike companies like Uber, Dropbox, AirBnB, and, in another era, Facebook, Snapchat is just three years old and has raised just a handful of funding rounds from just seven investors up until this point. It’s also never generated a dime of revenue. One thing Snapchat does have (in spades), is users, with the Journal citing new information that the company has 100 million monthly active users – and two-thirds as many daily active users.
But despite all of the accolades, even though the valuation suggests Snapchat is a late-stage bet, the company is anything but. And as such, it’s not surprising that Snapchat is still adding venture and strategic investors, as opposed to more traditional pre-IPO investors, such as Coatue which led its December Series C round.
As we have reported previously, valuations in Silicon Valley are rising, making Snapchat's $10 billion price tag today akin to a $1 to $3 billion valuation just a few years ago. With massive trends like the global proliferation of mobile, the addressable market for the most successful companies is bigger than ever, meaning that the funding rounds and valuations are rising in lock-step. And with deals like Whatsapp’s recent $19 billion sale to Facebook – though it was generating meaningful revenue at that time – the venture and M&A math at the top of these markets is being governed by its own set of rules.
Kleiner reportedly offered to invest $20 million into Snapchat in May, before the earliest rumors of this $10 billion round began circulating publicly. The WSJ story doesn’t specify which Kleiner fund is participating in this investment, but it’s a good bet that it will be the Mary Meeker-led digital growth fund. If the above figures hold true, that would give the firm just a 0.2 percent ownership stake in Snapchat, before dilution based on the round itself (which is of unknown size).
Given the paltry ownership rate, many will accuse Kleiner of logo-hunting – that is making a token investment just so it can later point to the fact that it was “in Snapchat.” But as Sarah Lacy pointed out today, there is an idea in the Valley that there are certain companies that you should get into at any price at any time -- years ago when late stage liquidity rounds in Pandora, Facebook, Groupon and others were raging, John Doerr and Mark Pincus used to talk about them as “Internet treasures” and “digital skyscrapers” although that feels out of favor as a term, once Zynga was shown not to be one. Kleiner seemingly thinks that Snapchat is that kind of company.
Earlier this year, the lead strategic investor in this new round was rumored to be Alibaba, the soon to be public Chinese internet giant. A subsequent report by ReCode seems to pour cold water on that theory. But with the Journal saying that a strategic has agreed to participate and China’s Tencent already invested in Snapchat’s Series B, the question is, who could that be?
The list is not as short as one might think. Google (or Google Ventures) is a natural option, given how badly its online advertising rival Facebook wants to own Snapchat. To that point, Facebook has never been one to invest in minority stakes in companies, but Snapchat may prove to be a deal too enticing for it to lose entirely. Facebook is familiar with such investments, however, having taken money from Microsoft during its early rise. If Mark Zuckerberg has shown one thing it’s that the company’s M&A playbook can change based on market conditions and degree of paranoia. Accordingly, don't rule this one out.
Less obvious, but no less strategic options include advertising giants like WPP, Publicis, and Omnicom, as well as non-Chinese internet giants like Japan’s Rakuten and Russia’s Yandex or Mail.Ru. It wouldn’t be surprising, for that matter, if Yuri Milner’s DST were to show up on the company’s cap table in the near future. Snapchat might consider a payments giant like PayPal or a retailer like Amazon strategic, but both seem unlikely given their respective historical behavior and current turmoil. Less likely are old-world giants like Microsoft or Samsung, as they feel too stodgy and uncool for Snapchat’s tastes, although its impossible to rule anyone out if the price is right -- although Microsoft's early investment into Facebook shows there's president for this type of deal. Even Apple, with its seemingly endless piles of cash might seem like a possibility, but, like Facebook, the company has no history of making minority investments and it’s unclear how owning a piece of Snapchat helps it sell more hardware.
Underscoring all of this is the fact that Snapchat has yet to generate any revenue, a fact that would seem to set it apart from all prior eleven figure private company valuations. Facbeook, Twitter, Uber, Whatsapp, Dropbox, and AirBnB were each hailed at one point for their business models and the cash they were generating. On Snapchat’s end, his may be set to change within the year, according to the WSJ report, which says that Snapchat has “held talks with media companies and advertisers in recent weeks about a new content service called Snapchat Discovery.” While this process will be uncharted waters for snapchat, the company’s recently hired COO Emily White is no stranger, having led Instagram’s business efforts as the Facebook-owned photo sharing platform launched its own popular advertising service last year. She was there during the beta phase of this product, but left before seeing it through to scale.
Snapchat has seemingly been laying the groundwork for this contextual and narrative advertising initiative for much of this year, including launching its MyStory and OurStory publishing products, and Geofilters location-sharing feature. With the highly coveted teen and young adult demo sending hundreds of millions of daily messages in the service, it would seem well positioned to begin monetizing that audience. Figuring out how to do so without losing its “cool-factor” will be the biggest challenge of all. For advertisers, however, Snapchat looks like it might finally deliver a long-coveted alternative to Facebook for reaching large consumer audiences. Other than Twitter, which is still finding its sea legs in the advertising world, Snapchat is really the only option today.
One thing’s for sure, Snapchat certainly won’t be capital constrained as it looks to tackle this next phase of growth. Contrary to most reactions at the time, the company appears smart to have turned down that $3 billion acquisition offer from Facebook last Fall. The founders have already taken some modest liquidity up to this point, meaning that the game plan now is to go big at all costs – which is a good thing because they’ve priced success at levels only seen by Facebook, Twitter, and Linkedin in the social world. Frequently mega-valuations are a trap – see Square and Box – but Snapchat remains a highly valued acquisition target, meaning it has options, unless it suddenly goes the way of Friendster or MySpace.
With the bar for success set in the stratosphere, the company would appear wise to continue taking all the cash it can, regardless of price. It’s still going to take time and deft execution to make good on this new round. But if today’s news indicates anything, it’s that there are likely plenty more suitors lined up, willing to inject more capital into the company should its bank account start to run dry.