Why is Snapchat Worth $20 Billion?

Vijayendar Sridharan's analysis indeed touches on several nuances, but it also raises several questions that need further clarification. In this article, we delve into the complexities of Snapchat's revenue model, user growth, and overall strategy to understand why this app is considered valuable by its investors and stakeholders.

Revenue Model and Monetization Strategy

Snapchat, founded by Evan Spiegel, has only recently begun to monetize its platform. Until late 2014, the company's revenue was virtually zero. However, Spiegel's team has a clear strategy in place for monetization, albeit with a primary focus on growing the user base first. This strategy involves experimenting with various advertising methods, which has led to some limited but impactful forms of monetization.

Advertising on Snapchat is minimal and primarily focused on Brand Stories and Our Stories within the app. Discover feeds, which are sponsored, provide another avenue for advertisers. Unlike many other apps, Snapchat's website does not carry any advertising, and if ads were to appear in the future, they would likely be within the app itself.

User Base and Growth

The scale and growth rate of Snapchat are remarkable. With around 200 million active users in just three years, the app has managed to attract more users than the Facebook app in the same timeframe. While Snapchat's user growth is concentrated in the developed world, its high engagement rates among its primary demographic (16-24 year olds, mostly female) have been key to its success. Millions of Snapchats and Stories are generated daily, indicating a highly engaged user base.

According to data available on the internet, 700 million Snaps are sent and half a billion Stories are watched each day. This level of daily engagement is a testament to Snapchat's ability to capture the attention of its highly engaged audience. The company's strategy is clear: capitalize on this engagement to create a powerful media platform for the digital native generation.

Funding and Valuation Strategy

Snapchat's fundraising model is unique and highly strategic. Unlike traditional startup funding models, where a fixed amount is raised for a set valuation, Snapchat employs a rolling investment approach. This method allows the company to attract a diverse range of investors at different valuations, significantly increasing its flexibility and allowing it to maintain high valuations.

As TechCrunch notes, Snapchats funding model is remarkably flexible. CEO Evan Spiegel is said to be adept at this approach, which has allowed the company to raise nearly $500 million in the last six months, with only $75 million considered "closed". The strategy of valuations is driven by the numbers but also reflects Spiegel's skill in managing investor expectations. This approach positions Snapchat to continue growing while maintaining high valuation, aligning it with the vision of Twitter-scale profitability.

Why is Snapchat Valued at $20 Billion?

The high valuation of Snapchat can be attributed to a combination of factors: rapid user growth, strong engagement, and innovative monetization strategies. While traditional revenue metrics show current profitability, the potential for future growth and market disruption in the media and advertising industries is key.

Beyond its current user base, Snapchat's platform offers a unique opportunity for brands to engage with their target audience in a way that traditional media cannot match. The app's ephemeral content and real-time communication features make it a powerful tool for brands looking to connect with younger audiences. This strategic value is what drives its high valuation in the eyes of investors.

Conclusion

Snapchat's valuation of $20 billion is a reflection of its innovative approach to digital media, user growth, and strategic monetization. The company's ability to attract and retain a highly engaged user base, coupled with a flexible and innovative funding strategy, positions it as a formidable player in the digital advertising and media landscape.