Snapchat: Yet Another Valuation-Without-Revenue Company

According to the most recent Social Media report by Nielsen, the time spent on social media networks in the U.S. such as Facebook and Twitter grew 37% over the year from 88 billion minutes in July 2011 to 121 billion minutes in July 2012. The rise is attributed to an increase in the use of mobile devices. In July of last year, time spent by users on social media sites using mobile apps grew 63% over the year. While Facebook may be the leader in social networking, other sites and applications are also seeing stellar growth, at least in terms of the number of users.

Snapchat’s Offering
Pacific Palisades, California–based Snapchat is one such player. Snapchat was founded in 2011 by Stanford graduates Evan Spiegel and Bobby Murphy. The mobile app lets users take photographs and videos and send them to others on their friends list. The recipient can view the picture or video for only a few seconds before it self-destructs. The Snapchat app is available free to download on both iOS- and Android-based devices and is rated as number four among top free apps in the iTunes store.

Snapchat has established a significant fan following among teenagers. The company has not disclosed its operational statistics, but market reports suggest that the majority of users are in the 13 to 24 age group. But the app has seen its share of controversy. Snapchat’s capabilities are cause for concern by adults who are worried that the app makes it easier for teens to engage in “sexting” because it gives “a sense of security for teens who think they can send an embarrassing picture without consequences.”  Despite such issues, the company recently crossed a milestone of more than 50 million photo images being shared daily. Facebook’s Instagram is a distant competitor, with a mere five million uploads daily.

Not surprisingly, Snapchat has yet to generate revenues. The four-employee organization claims to have millions of followers, but still no revenue model. But that hasn’t stopped its valuation from rising. Snapchat has received seed funding from Lightspeed Venture Partners and recently raised $8 million in venture funding from Benchmark Capital. The funding round valued Snapchat between $50 million and $70 million.

Snapchat Competes with Facebook
Snapchat’s growing popularity has caused concern in the Facebook camp. Last quarter, Facebook released a new mobile app, Poke, to compete with Snapchat. Like Snapchat, Poke lets users send self-destructing messages, photos, and videos and comes with added features such as location alert to a user’s Facebook friend list. The biggest disappointment with Poke, though, is that there is no certainty that Facebook really deletes the Pokes. Reports suggest that while a Poke is deleted instantaneously, one can potentially recover it within 90 days of it being sent.

Facebook’s Poke still has a long way to reach the popularity that Snapchat has commanded. Its mobile app is rated 70th on the iTunes store, and market reports suggest that since its launch, Snapchat’s popularity has risen.

Now that Snapchat has proven its position in the market, it should be looking at monetizing capabilities. Analysts believe that technology giants wanting to make it big in the social world, such as Google and Yahoo, may be evaluating a possible acquisition. Facebook’s $1 billion acquisition of Instagram has already set a precedent. Facebook too may use more spare change.

At least that’s what the investors must be thinking!