Snapchat: and why it’s worth $10 billion. Perhaps.

What’s the first thing that pops into your mind when you think of Snapchat?

…Sexting, amirite?

I mean, what else is the point of a messaging app that deletes your messages/photos/videos almost as soon as your receiver has read them?

Which is probably why there is plenty of aghast in the blogosphere at rumours that “highly regarded venture-capital firm Kleiner Perkins invested an additional $21.44 million into Snapchat, which raised its valuation to a lofty $10.71 billion.”

Some Observations, like, “that $10.71 billion is not a real number”

However you feel about it, no one has actually paid $10.71 billion here.
Someone has possibly invested $21.44 million.
And if they have done it, they’ve bought 0.2%* of the shares with that $21.44 million (which seems absurd).
*The math: if shares bought for $21.44 million imply a company valuation of $10.71 billion, then you can only have bought 21.44 million ÷ 10.71 billion = 0.002% of the available shares.
More importantly, the rumours aren’t really talking about ordinary shares – they’re talking about preferred shares.
Preferred shares (ie. preference shares) are essentially debt pretending to be equity.
So to use preference shares to imply a valuation seems, well, insane.
But perhaps that’s just me.
In any case – it’s all just rumours.

That aside, I thought that it would be worth asking Google why anyone would actually want to own a piece of a sexting app.

Apparently it’s not a sexting app

So there are some studies out there (I’ve quoted wikipedia, who quote a study that seems too new to be online):

Only 1.6% of Snapchat users primarily use Snapchat for sexting.
Although 14.2% of people have used Snapchat to sext.
Everyone else just seems to use it because it’s fun – but not in a sexual way?

The Hierarchy of Communication Method

Of all the explanations that I’ve heard for these bizarre usage statistics, the one I like most belongs to Cathy O’Neil (she of mathbabedotorg and Slate Money fame). It goes something like this:

We live in the age of the millenial.
Millenials are weird.
And even though I’m technically a millenial, it seems that there is a split developing between millenials born in the 80s and those born in the 90s.
The 90s millenial, on average, ain’t really a facebook fan. They’re more ephemeral in their tastes (as I understand it, this drives Facebook crazy), and even more ephemeral in their habits. It’s all a bit too flexible for this 80s millenial over here – but there it is.
And in this ephemeral world of the 90s millenial, there is a signalling effect that attaches itself to the communication method that you use.
For example:
1. A phone call – means that the conversation is serious and urgent and you absolutely must answer/respond/call-back.
2. A skype call – means that the conversation is largely unimportant, and you’re allowed to do other things during (like play World of Warcraft).
3. A text message – means that the message/invitation is serious and serious things could come of it.
4. A whatsapp – means that the conversation is not that serious, but it definitely demands a reply from you.
5. A snapchat – means that you’re just being kept in the loop, but nothing so serious that you’re expected to respond. As in “Hey, I sent you this funny picture because you might laugh. Whatever. I don’t need to be affirmed with a haha or a lol.”
6. A yo – is the 90s millenial version of a facebook poke. A response of next-to-no effort is expected. Maybe.

Why Snapchat might be worth something

In the interests of being journalistic, I downloaded Snapchat this morning (I also downloaded Yo – but that’s for another time). As it turns out – I don’t have too many friends on Snapchat (interestingly, I have zero friends on “yo”). But the Snapchat friends can mostly be split into four camps:

90s millenials (my siblings)
80s millenials who have siblings that are 90s millenials
Those that I’m pretty sure were just checking this thang out.
A disproportionate number of people that might be part of that 1.6%.

So I tried to use it – and it is surprisingly fun, actually. Sending a photo that you can hand-doodle captions on? Pretty awesome.

But here’s why I think that advertisers in particular might like it (and full disclosure – I have basically plagiarised this idea from Jordan Weissmann):

In order to view a snapchat photo or video, you have to hold your thumb down on the touchscreen. That is: it requires your undivided attention, or else you lose it.
Question: how many things get that level of focus?
If an advertiser can get you to read an advertisement with that level of attention, then that would separate Snapchat advertising from almost all the other kinds.
And even if the advertiser fails to get your attention for quite as long as he needs, consider that the data from Snapchat will indicate just how long, on average, people are viewing the message before they stop? That’s not just an impression on a Google page that may or may not be glanced at – that is a clear indicator of a very specific view of the advertisement.
As I understand it, that type of advertising data is pretty close to priceless?

I mean – I hope so. Because as hypothetical as it is, a $10.7 billion valuation for a company that has never generated even a smidgeon of revenue (never mind profit!) needs that kind of priceless idea to justify the craze.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.