March 15, 2017

LETTER TO THE EDITOR: Why we should value Snap

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To the Editor:

The basic premise of Soren Malpass’s The Value of a Snap was that we will be looking at another dot-com crash if today’s venture capitalists keep up their current investing habits. The author questioned the valuation of a number of well-respected unicorns and specifically targeted newly-public Snap, arguing that the service that Snap offers doesn’t justify its (at the time) $28 billion valuation. Frankly, I think the analysis of the industry, and Snap’s business specifically, was lazy. Here are my qualms with the skepticism over Snap’s valuation:

1. The idea that a business cannot be legitimate if it only relies on advertising revenue is ludicrous. Two of the six companies with the current largest market cap (Google and Facebook) get over 80 percent of their revenue from advertising. The placing of Google  based on information that they deduced about you from your internet habits, which can sometimes lead to incorrect assumptions about users. Facebook ads are an upgrade on Google ads because all of the information that Facebook uses to target ads is offered up voluntarily by the user and therefore is much more accurate than the information Google uses. Snapchat advertisements are better than Facebook ads because they are either video, which allows advertisers to quickly engage viewers, or they are sent from friend to friend as part of a filter or lens, in effect having a friend endorse some product/event. This endorsement from someone a customer trusts is an advertisers dream. Because Snapchat’s ads are more effective/engaging, they can justifiably charge more for their advertising services than even Google and Facebook.


2. The author delegitimizes how important lenses (or bunny ears) are to Snap’s overall product roadmap. Augmented Reality, of which lenses are an example, is going to become a huge part of our day-to-day lives over the next decade. You only need to have heard of Pokemon Go to understand the craze that augmented reality can create. Snapchat has possibly the best AR technology in the industry and currently has a huge number of consumers using it. The thing that really cements a company as a dominant player in any industry is when they become a platform that other products are built on top of (see Microsoft — Windows; Intel — Core i7; Facebook — identity management for websites). This is what Snap has the opportunity to do with their current lead in AR: become a platform for the development of AR software by other companies. If they can successfully achieve that, Snap will be a Fortune 100 company for years to come.


3. A smartphone app is not the long-term focus of Snap. Snap has continually defined itself as a camera company. Smartphone apps are the easiest way to scale a service if you’re a poor college student with little money but a great idea — you release it to the app store and everyone can use it immediately. It makes sense that Snap’s first product was Snapchat. Developing hardware is another story altogether. Spectacles is Snap’s first step in developing a focus on hardware, and now that they have a huge influx of cash from their IPO they will push R&D further in that direction. When they start incorporating real-time AR into their glasses/cameras, they will be untouchable on that front.


This shallow analysis of valuations extended beyond Snap to the industry as a whole. No investor in their right mind would invest hundreds of millions of dollars into a company that has “no real means to generate revenue.” The reason these companies are not generating revenue already is because they are focused on growth first and foremost. It is much easier to scale a product if the user experience is not impeded by ads or if prices are too high. Growth companies focus on adoption first, and only when they are satisfied that a slight drop in user experience will not scare off consumers do companies start to focus on making a profit. This is not to say that leaders in these companies do not have a plan for monetization — only that their product doesn’t reflect that while they are working hard to expand.

While many of these companies don’t currently make any profit, I’d have a hard time believing that none of them ever will. In fact, out of the 226 companies listed as unicorns as of March 6, I believe that one of them will get to be the size of the big 5 technology firms (Apple, Microsoft, Google, Amazon and Facebook, all valued at $400 billion or more) and four more will get to one quarter of that valuation. If this turns out to be true and the valuation of every other unicorn goes to zero, the sum total of those valuations would be $800 billion, which is actually more than what all 226 companies are currently valued at in aggregate, $775 billion. With this in mind, it appears to me that our current unicorns are in fact undervalued. So rest assured that there is no calamity on the scale of the dot-com crash on our horizon.

—James Mackey ’17