2016 IPO Prospects: Snapchat Needs to Up Monetization ASAP

According to a recent eMarketer report, the global mobile phone messaging app user market was estimated to have grown 32% over the year to 1.4 billion users worldwide in 2015. The sector is dominated by Whatsapp, which recently announced a milestone membership of more than 1 billion active users, and Facebook Messenger – both of which have presence in more than 20 countries worldwide. By 2019, eMarketer expects this number to grow to 2.19 billion users.

Snapchat’s Financials

Whatsapp may be among the biggest mobile messaging apps, but Snapchat is probably one of the more controversial ones. Pacific Palisades, California-based Snapchat was founded as a Stanford class project by Evan Spiegel, Reggie Brown, and Bobby Murphy. Like other mobile messaging apps, Snapchat sends mobile messages including photographs and videos over the Internet. The difference being that Snapchat allows the message to be viewed only for a few seconds before it self-destructs. The ephemeral nature of the messaging service has made it a preferred app among teenagers. It has led to the evolution of “sexting” where users are able to send messages without worrying about consequences.

The Snapchat app is available for free, but it earns revenues through in-app purchases such as lenses for photo-shopping selfies and features that allow replays and advertising. The company began experimenting with monetization in October 2014. It does not disclose financial details, but market reports suggest that in 2014 it earned $3 million revenues and lost $128 million. In 2015, revenues were trending at $100 million.

Snapchat is venture funded so far with $1.2 billion in funding from investors including Alibaba, Fidelity Investments, Glade Brook Capital Partners, York Capital Management, August Capital, Yahoo!, GIC, Kleiner Perkins Caufield & Byers, Coatue Management, Tencent, SV Angel, Benchmark, General Catalyst Partners, Institutional Venture Partners, and Lightspeed Venture Partners. Its last round of funding was held in March last year when it raised $537 million at a valuation of $16 billion. Valuation has grown significantly since the $10 billion valuation as of December 2014 and $2 billion as of December 2013.

Snapchat’s Monetization Focus

Snapchat has been focused on improving monetization capabilities since last year. The app has over 100 million daily average users and would like to leverage this pool to earn revenues. Snapchat is counting on advertising as its revenue driver and it is seeing mixed reaction from advertisers. According to management, Snapchat gets 7 billion daily video views and is selling ad packages for as much as $10 million. But its ad business isn’t very stable. Unlike other media companies, Snapchat does not offer targeting and analytic capabilities for ads delivered through its network. It makes it difficult for advertisers to ascertain the true impact of the ads. That is one of the reasons why there are days when a user doesn’t see any ad at all.

It is hoping to improve this with products like Live Stories, Discover, and Local. Discover is a content discovery site that allows users to see updates on news, sports videos, and micro television channels through its tie-ups with media companies like CNN, ESPN, and The Food Network. Live Stories allow users at an event or a location to contribute Snapchats of the same story and Snapchat Local gives users access to localized information. Snapchat is using these tools to help advertisers deliver their ads to a target population. It is also working with third party ad-effectiveness measurement partners to help advertisers understand the benefits of the ads.

But the efforts aren’t helping Snapchat much. According to recent news reports, Fidelity Investments, an investor in Snapchat, wrote off 25% valuation on its investments, thus reducing Snapchat’s valuation to $12 billion. Last year, Snapchat commented about its intention to go public. It may need to work harder on its revenue model before it finally decides to take the plunge.

Currently, the market is in a correction mode. If Snapchat cannot significantly increase its monetization, valuation will further drop. A $100 million revenue run rate company will not be able to sustain a $12 billion valuation  in the current condition. Furthermore, profitability is still a concern, as is the wobbly, unconvincing nature of the revenue model.

This company is one of the worst examples of the unsavory Unicorn mania that we have seen in the technology industry over the last couple of years. If it tries to go public, it will be hammered. And, I don’t know if there are any suckers left who would want to invest in it in the private market anymore either.

Tough days ahead!

This segment is a part in the series : 2016 IPO Prospects