Approx. 1 min 29 second reading time
Snapchat was founded in 2011 and is a technology start-up from Los Angeles. The app gives its users the ability to share images for a set time limit, before they then disappear. Its popularity as an application has exponentially grown, with 100 million monthly active users and an average of 400 million snaps a day. It turned down an offer of $3 billion by Facebook in late-2013 (stats).
How do they make money?
They don’t, really. The reason why technology companies are being valued so highly is because of their propensity to bring in future revenues. The theory is that while they are not currently revenue-generating companies, clever marketing and sales teams in the future will be able to utilise the huge memberships and create that promised cash flow (remember, 400 million snaps sent a day. The ability to put a small logo on each snap would be an incredible marketing tool).
These companies are also bid up due to intellectual property laws and a very competitive technology market. It is lucrative for companies like Facebook, Google and Alibaba to be the company with control over this huge user-base, effectively attempting to lock-in the future revenues and reduce competition in the social media market. Therefore a premium is paid for companies like Snapchat that have a unique niche in the social media market, and a large group of daily users.
However it appears there could be a vicious cycle developing. Facebook’s IPO peaked at $104 billion, arguably very high for their revenue generation at the time ($1bn). The IPO then provides Facebook with a significant amount of cash, which they then spend acquiring other tech companies, both to prevent Google and other tech companies from purchasing them and to increase their presence in the social media domain. As a result of then having a larger user base and a greater propensity for future revenues the tech companies are then valued even higher, with even more cash to spend on even more acquisitions.
It appears tech companies are being valued highly, spending the money they raise from these valuations to then be valued even higher, whilst never actually fulfilling their promised revenues.
What we could be looking at is one very big technology bubble.
Let me know what you think @Breadeconomics