What makes Snapchat stand out?

Sep 3, 2014

Beijing, China

Dear Diary,

We are sitting in the lobby of the China World Hotel. It is a very large space and very unlike most hotels. Monday, we stopped into the lobby of the Marriott 'Ambassador' hotel on Boulevard Hausmann in Paris. Like most lobbies, it was very quiet, with just a few people having coffee.

Here, there are hundreds of people - almost all young. We are the oldest person here, a fossil from another continent and another time. The young people dressed casually, but well. They sit in groups, talking...as if they were business planning their next marketing campaign.

There is scarcely anyone over the age of 40. We have started a small publishing business here. It, too, is staffed by people in their 20s. What happened to the old people, we wondered? Maybe they have not been able to keep up with the breathtaking changes in China. This is no land for old men...

"Everyone has great confidence in the future," says a Chinese colleague. "Things have gotten so much better over the last 20 years. And we expect that to continue.

"Xi Jing Ping [China's president] is serious about trying to get rid of corruption, even at the highest levels. He is basically trying to deregulate whole industries. Regulations and licenses were really just a way for officials to demand bribes and payoffs. So, Xi wants to get rid of a lot of this so we can do business more freely."

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    It was leaked on Tuesday [of last week] by "people with knowledge of that matter," according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn't closed yet, would give Snapchat a valuation of $10 billion.

    That's a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, "according to two people familiar with the matter."

    At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community's darling ($9.3 billion).

What makes Snapchat stand out is that it has no business model, no revenue, and no profits. It has, as near as we can tell, a lot of very young users who send photos to one another. How can Snapchat monetize that? Who knows?

Perhaps a better question is why would a bunch of rich, rational money-grubbers at KPCB want to invest good money in Snapchat? We don't know. Maybe they know something we don't know. Maybe they have a lot of this kind of inventory in stock? And maybe, they believe that pumping up the whole sector will be good for business.

What's their business? It is simple: smart guys sell things to guys who aren't so smart; the pros unload onto the amateurs; Wall Street offers IPOs to retail investors. Putting a little seed money into Snapchat...giving it a nutty valuation...is a like bidding up odd paintings by contemporary artists. Quirky works of art are suddenly very valuable, simply because someone paid a lot of money for them. With no earnings to guide prices, valuations can go to the moon. KPCB - with a lot more Snapchats where this one came from -- is along for the ride.

But, do you, dear investor...want to be taken for a ride, too?

More on this...tomorrow.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "What makes Snapchat stand out?"

Agnel Pereira

Sep 13, 2014

This whole world is a great balancer! It balances out the wealth of rich but unintelligent people and tries to distribute across to others. PE firms may make a big deal here and there, but for that we have the balancers like th 2008 collapse, 2000 dotcom bust etc!

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