As I get older, I’m starting to think the best way to predict a tech trend’s success is by how little I understand it. Right now, the app at the top of that list is Snapchat. I’ve tried to use its disappearing messages a few times, and I’ve watched a few “Snapchat Stories,” which—as best I can tell—are like Vines except they go away. And I honestly don’t get it.
But Snapchat CEO Evan Spiegel isn’t losing sleep over my lack of comprehension. Last week, Bloomberg reported that Snapchat was seeking to raise as much as $500 million in a financing round that would value the company as high as $19 billion. The amount may seem vast to aging pundits like myself whose memory banks include dim recollections of the 1970s. But it’s exactly my fast-approaching irrelevance as a tech consumer that makes 11 figures a totally reasonable sum for a startup run by a 24-year-old that has only the dimmest plans for making money
Tech is about the future. And judging by the recent past, the future looks like Snapchat.
Before Snapchat’s valuation, $19 billion stood out in Silicon Valley lore as the price Facebook paid for messaging service WhatsApp. The figure was later revised upward to about $22 billion. Either total seems like a ridiculous amount for another company that hardly made any money. But a year later, the deal is starting to look like a steal.
At the time it was bought, WhatsApp reported 450 million users on the service. Just after New Year’s 2015, WhatsApp co-founder Jan Koum said his company now had 700 million monthly active users—an increase of nearly 56 percent. Sure, WhatsApp lost $138 million last year. But that’s less than a dollar spent for every user gained. In all, Facebook spent about $49 per user at the time it bought WhatsApp. At WhatsApp’s current user base, that cost goes down to less than $32 per user.
If Snapchat really does reach critical mass with teen users just coming into their own as digital consumers, the network effect could be explosive.
That price puts WhatsApp in the vicinity of two of the greatest bargains in recent tech history. Facebook bought Instagram in 2012 for $1 billion, or a little less than $29 per user. At the time, the photo-sharing app had about 35 million active users. It now has 300 million.
The other most relevant point of comparison is YouTube, which Google bought in 2006 for $1.65 billion. Shortly before the purchase, YouTube was reportedly seeing 19 million visitors to the site monthly, or nearly $87 per visitor. Today, YouTube reports more than 1 billion visitors, and estimates peg its ad revenue at $1 billion annually.
As a private company, Snapchat doesn’t reveal how many users it has. The Wall Street Journal puts the number at more than 100 million. That would peg the price of each user at the valuation Snapchat is currently seeking at $190, or a lot more than WhatsApp, Instagram, or YouTube. But Snapchat shares with all three a product that appeals to a global audience of millennials and teenagers and that works best on the mobile devices that audience prefers.
To be sure, Snapchat could hit a saturation point like Twitter and level off below the 300 million user mark. But Twitter is where oldsters such as myself like to play. If Snapchat really does reach critical mass with teen users just coming into their own as digital consumers, the network effect could be explosive.
Sure, me and my fellow fuddy-duddies might not be there. But to Snapchat and its investors, our attention doesn’t matter that much. They’re looking to the eyeballs of the future, a market that over the past decade has made billions look like a bargain.