These are strange times we live in, when a sanctum for selfies and sexting is valued at a half a billion dollars. Yet here we are. GigaOm reported Friday that an "untraditional" backer (Om guesses a hedge fund) will infuse the beloved photo-messaging app SnapChat with an additional $100 million in funding, and has valued the startup at a whopping $500 million.
That's pretty whack. Not because it's a ton of money—though it’s nothing to sneeze at—but because it begs the question, why do investors think a silly app with no clear revenue model is worth so much money?
Sure, SnapChat has seen extraordinary growth in the last several months, and a whole lot of buzz. It sees some 150 million "snaps" per day from some 5 million users—mainly teens and college students, an enticing market. And the startup's valuation leaped from $70 million to $500 million in just half a year.
It's certainly a helluva lot of users, but users aren't dollars. In fact, 10 years into the Web 2.0 era, no one's quite yet cracked how to translate online users—even the most engaged, loyal, obsessed users—into cold hard cash. SnapChat still isn't earning any revenue, and CEO Evan Spiegal’s business plan is less than inspired—basically, inserting ads at some point. "We track engagement, so when you view a snap, we can determine what is valuable branded content," Spiegal said. "That's an awesome ad model." (Side note: Spiegal is 22 years old. Natch.)
In reality, SnapChat’s business plan probably looks something like this: "Maybe someone will buy us!" It's the entrepreneur's dream, exacerbated by those one-in-a-million success stories producing exciting headlines and 20-something billionairres.
Prior to this latest reported influx of cash, SnapChat was prime for an acquisition. Now, The Next Web points out, the bloated valuation may have put the startup out of some companies’ reach. For $60 million, sure. For $500 million, folks are going to think twice.
Then again, fellow photo-sharing app Instagram was scooped up by Facebook for $1 billion, with no revenue and less daily photos than SnapChat claims today (40 million vs. 60 million). Most recently, Tumblr, the much-loved yet financially struggling blogging platorm, was rescued by Yahoo! in a $1.1 billion acquisition.
The New York Times recently warned these success stories are dangerous for young entrepreneurs to pay too much mind to. It's like when people justify playing the lottery by insisting, "But my cousin's good friend won 10,000!" or "Someone has to win."
That irresistible lure of a big payoff is problematic, the article goes on, because it means entrepreneurs aren't starting companies with the most righteous of intentions. Questions like whether the business is sustainable, profitable, or even remotely useful aren't the centerpiece of conversation. And not just for the execs—VCs too; Tumblr's angel investors made nearly $200 million off the acquisition. "Tumblr’s way is a lot easier," the Times reports. "It will not stand the test of time, but for now, every upstart technology chief executive is going to try to win the next lottery the way Tumblr did. And about 99 percent will fail. "
Which leads us back to SnapChat—addictive and fun, but otherwise, basically the most frivolous app ever. (To say nothing of the fact it doesn't even work properly: Privacy advocates recently learned the app's self-destructing messages aren't actually deleted—oh snap!)
Increasingly, big-name VCs are calling on Silicon Valley innovators to use their skills to help solve society's myriad problems—problems more pressing than how to send a provocative photo without getting caught.
To move in that direction, startups need to have more exit options, and more business savvy. Now, the lion’s share of founders have backgrounds in engineering and technology, not MBAs, and are focused on ideas and products rather than scalability and profit models. Thus, we're caught in an endless cycle: Old boring company swallows new cool company until new cool company becomes old boring company and swallows the next one.
It's a sort of economy of cool, not value. And though it's flooding Silicon Valley and other burgeoning tech hubs with cash, the long-term question is, is it creating any real value to society?