The Real Reason Why IVP Invested In Snapchat
It’s not what they say
Snapchat, the instant messenger that self destructs photos, recently raised $60 million in funding which valued the company at $800 million pre-money. The round was led by Institutional Venture Partners (IVP) with participation from General Catalyst Partners and SV Angel, and continued pro-rata participation from Benchmark Capital and Lightspeed Venture Partners.
IVP has officially, in a press release, have listed about ten reasons on why the firm invested in the company. The investment is peculiar since IVP usually invests in companies that have $20-100 million in annual revenues, it says. Snapchat is yet to make any money. It mentions that Snapchat is a mobile first, high engagement, and the fact that it’s photo based instead of words that made IVP invest in them. Rest of the reasons are BS in my opinion. A page filler.
But first you have to understand the consumer market. Simply said it is unpredictable. What’s hip today, won’t be tomorrow if you do not innovate or bring new stuff. That’s what Facebook is trying to do and it has managed to remain relevant as it is constantly innovating its products.
Between 2004-2011 you’ll notice a boom between social networks with one to many approach. Everyone wanted to inform everyone what they are up to. See Facebook, Google Buzz, Twitter, and numerous other social networking sites.
However, people are now less enthusiastic about informing their acquaintances that their pets went for a walk. They now want to inform their day to day activities only to select few people who are important to them. Which is what gave rise to Path with a limitation of 50 friends network (now increased to 150).
Since 2009-10 people are highly engaging in one-to-one type of communication. Instead of announcing stuff, they now want to communicate. This has led to increase in instant messengers around. See WhatsApp, WeChat, Line, among others. Even Facebook was forced to model its messenger on the lines of IMs. Users now no longer need to have a Facebook account in order to use Facebook Messenger.
And this is going to be way we are going to be in touch with our friends.
Since it’s one-to-one, the engagement is going to be tremendously high. Besides, people won’t mind paying for the service. WhatsApp has said that it doesn’t plan to introduced ads on its messengers. The app is already a paid app on iPhone and charges a yearly fee for other smartphone platforms.
If you look at the IVP portfolio, you’ll notice they invested in Twitter in 2009. I doubt that Twitter, at that time, made anywhere between $20 million and $100 million. Besides, they have not invested in any of the social networking platforms. Instant messengers are still in nascent stage. Although they are not making any money right now, in next few months once the smartphone penetration in high and people start communicating with messengers instead of SMS, it’s going to be fun game.
Here’s the reason IVP should have mentioned in the press release but haven’t.
It never hurts to be an early entrant here and regret later than missing out on the next big thing. Here, I believe, IVP hopes that Snapchat becomes the Instagram of Instant Messengers. WeChat is already betting on Voice chats.
Another reason Snapchat is changing messaging and communication behavior irrevocably. Till date all we have been obsessed about is archival and retrieval of messages. Snapchat actually negates that. Imagine the storage being freed up. It also is creating an entirely new demographic of users. When it monetizes, there won’t be much storage cost.
That said, since the messages self destruct it also takes care of privacy of personal information. People no longer have be worried about whether the company will ever try to monetize on the kind of information that they have provided. This will only lead to more engagement. One of the reason I personally stopped using Facebook was that it was trying to invade my friends circle with irrelevant information.
This is a great investment by IVP in my opinion.
