Back in 2013, Snapchat (dismissed by many as a ‘sexting’ tool for teens) turned down a $3-billion buyout offer from social media giant Facebook. When the story of the non-deal surfaced, many tech insiders simply couldn’t fathom how Snapchat’s young founders could have snubbed the offer.
Fast forward two years, and Snapchat is getting the last laugh. The four-year-old ephemeral social network has since risen to become a darling of the tech world, currently valued at $15 billion after having raised a total of $848 million in seven funding rounds. This ranks Snapchat as the fourth-highest-valued private venture-backed company in the world. Meanwhile, its 24-year-old co-founder and CEO Evan Spiegel is himself now reportedly worth $1.5 billion.
But for many skeptics, a key question lingers. How can an ephemeral social network — over which people send images and videos that disappear forever just moments after viewing — be worth billions of dollars? How is a free service with reportedly little to no revenue or profit worth billions more than a music streaming service like Spotify — which boasts 15 million paying subscribers? And how can it be worth $3 billion more than Elon Musk’s SpaceX, a company that actually makes spaceships?
Here are three good reasons behind Snapchat’s huge valuation and a look at why it will continue to grow fast:
It’s the social network that’s (still) actually fun. Authoring Snapchat’s very first company blog post in 2012, CEO Spiegel described the company’s mission: “We’re building a photo app that doesn’t conform to unrealistic notions of beauty or perfection but rather creates a space to be funny, honest or whatever else you might feel like at the moment you take and share a Snap.”
From the start, Snapchat set out to be a different kind of social network — one that’s less about creating and projecting a polished image or persona (a la Facebook) than just about having fun. Users of the app send ‘snaps’ (pictures and short video clips) to one or more friends at a time or broadcast ‘stories’ (longer updates with a 24-hour shelf life).
Since all snaps (according to Snapchat) disappear forever after they’re viewed, users are free to be spontaneous — just like in real life — without fear of leaving a digital paper trail that will haunt them for years to come. Meanwhile, with little to no filtering or editing functionality, the updates that Snapchat users send are raw and uncut — inherently more authentic.
Finally, unlike other major social networks, on Snapchat there is no liking, sharing or commenting on these updates. The point of the network isn’t to win a virtual popularity contest or amass the most followers. Users post freely (yes, sometimes too freely) because they know they’re not going to be cut down or victimized by the trolls that plague other networks. And they can also be reasonably sure their latest updates won’t end up in the hands of mom and dad (or grandpa and grandma, for that matter).
This is just the beginning. In April, 40 million people tuned in to watch a livestream of the annual Coachella music festival — on Snapchat. (The stream consisted of a short montage of videos taken at the event by users, then curated and broadcast by Snapchat staff via the app.) Compare that to this year’s Grammy awards in January, which drew a TV audience of just 24.8 million viewers.
These numbers hint at a bigger trend: traditional media channels like TV are declining in popularity among younger generations. A recent Deloitte survey, for instance, showed that millennials between 14 and 25 now turn nearly equally to TV and social media as a source for their news content.
If the success of Snapchat’s live streams is any indicator, the company is poised to become a major player as a content provider. Or, maybe it already is. At the start of this year, Snapchat launched a new feature called Discover, partnering with a medley of notable publishers including CNN, Yahoo, VICE, National Geographic and more. Discover consists of different content “channels” where each publisher posts a selection of new stories daily. So users can get news — tailored uniquely to them — without ever leaving the app.
Also, just last month, the company reportedly hired CNN political correspondent Peter Hamby, leading to speculation that Snapchat could be developing its own news division or even moving into political news coverage.
The cool kids are on it — and advertisers want access. Snapchat’s unique demographic is one of the biggest factors behind its soaring value. For starters, it’s getting bigger all the time. Snapchat may “only” have 200 million users, compared to Facebook’s 1.4 billion, but its user base is the fastest growing of any social network. Meanwhile, current Snapchat users are young — very young. They’re mostly between 13 and 25 years old, compared to Facebook users, who average out at 40. (In recent years, Facebook has experienced a steady and very public decline in its teen user base.)
For brands and media companies, forever trying to connect with tomorrow’s consumers, Snapchat offers access to a highly coveted demographic. Furthermore, a recent Pew survey showed that Snapchat’s young users also happen to come from wealthier households.
Snapchat hasn’t quite nailed down a particular revenue-building strategy yet (just last month the company killed its original ad platform, Brand Stories). But considering the major push behind Discover (including new “draw and share” functionality that lets users doodle on news stories) and the success of live streaming events like Coachella, the company is close to finding a way to monetize its user base.
Bottom line: Snapchat isn’t resting on its laurels. And it certainly isn’t some sexting app anymore. In fact, the steady stream of investments over the last two years has opened up the door for more growth and experimentation going forward. Here’s guessing that Snapchat’s current $15-billion valuation will itself look like a bargain in a few years’ time.