Credit: Shutterstock photoStarted as a class project for Stanford University students Evan Spiegel, Reggie Brown, and Bobby Murphy, Snapchat has grown to be one of most popular messaging and social media apps in the world. It allows users to take photos, record videos, add text and drawings, and send them to a controlled list of recipients. Photos and videos disappear within seconds (between 1-10 seconds; amount is up to sender) after the recipient views them.
It was officially launched in 2012, and is available for both iOS and Android users.
Valuation
Snapchat has raised nearly $650 million in 6 rounds of funding, an astonishing number that was raised with help from companies like Chinese internet giant Tencent, Coatue Management, Kleiner Perkins Caufield & Byers, the Government of Singapore Investment Corp. (GIC), and Yahoo.
Thanks to the latest round of funding in December of last year, Snapchat has reached a valuation of about $10 billion, putting them in the elite clique of tech startups which have attained a similar estimation. It was announced in February that the company is seeking a new round of funding that would value the company as high as $19 billion.
IPO Buzz
Along with an impressively high valuation, Snapchat has been making strategic business decisions over the past few years that hint at the possibility of an IPO.
Back in 2013, the company caught the attention of tech giants Facebook Inc ( FB ) and Google Inc ( GOOG , GOOGL ). The companies offered to acquire Snapchat for $3 billion and $4 billion, respectively. In a bold but smart move, Snapchat turned down both offers, with attention from investors rising exponentially as a result of the decision.
Late last year, the Los Angeles-based company hired Imran Khan, the Credit Suisse banker who led Alibaba's ( BABA ) IPO earlier in 2014. His title will be Chief Strategy Officer.
In addition to Alibaba, Khan has personally led IPOs for Groupon, Bazaarvoice, Taome, and Tondu, as well as King, the maker of Candy Crush Saga, with guidance from Credit Suisse.
Khan joins other high-profile hires such as Emily White, formerly of Instagram and Facebook, as COO, and Jill Hazelbaker, who is known for her PR work for New York mayor Michael Bloomberg, U.S. Senator John McCain, and Google. While one of the company's founders, Evan Spiegel, is the firm's CEO.
Ephemeral Engagement
Since its beginning, Snapchat has utilized the idea of engagement, and has made it a priority in their development and business model. Engagement is not new for social media applications. In fact, it is very important to all social media companies, as engagement is the driving revenue factor, besides advertising. Snapchat, however, is approaching it in a completely different way.
Harvard Business School Professors Marco Iansiti and Karim Lakhani, offer an interesting perspective on this idea. In an introduction to the elective course "Digital Innovation and Transformation" presented on HBS's Digital Initiative, a platform that explores the digital transformation of the economy, Iansiti and Lakhani argue that Snapchat "is not just a messaging system, but also a social network, a community, and an ad platform."
Most importantly, Snapchat is an ephemeral (short-lived) messaging system, social network, community, and ad platform. Their unique, yet increasingly popular application method is a major contributing factor to their success. Even Facebook is trying to live in the moment, so to speak. CNBC reported last year that the company has been working on a competitor called Slingshot, a service that allows videos and messages to appear for up to 10 seconds.
Iansiti and Lakhani continue, arguing that "Snapchat provides a window into this challenging question: what drives value creation and capture in today's digital economy?" In other words, Snapchat offers a business model perfect for our current digitized economy, monetizing ephemerality in an innovative way.
Advertising
Not only is Snapchat monetizing ideas, but it is also attempting to make money off its user base, of which there are roughly 100 million monthly active users, by introducing transient advertisements that disappear after a set amount of time.
This is a basic yet clever business move for the company; Snapchat boasts an intensely high user base, with more than 700 million disappearing "snaps" being sent and more than 500 million stories viewed on a daily basis.
The combination of large user base and high daily activity is a goldmine for advertisers. Snapchat recognizes this fact, and is charging an astounding $750,000 minimum for a day of advertising. By charging per day instead of the usual per click, the company is letting go of the typical internet advertising model.
The price may be staggering for some, but because of Snapchat's huge, engaged audience-an audience that is compiled mostly of the hard-to-reach 13-24 year old demographic-their early ad products have attracted big-name buyers like McDonald's, Samsung, Macy's, and Universal.
Problems to Consider
Despite all of the company's positive aspects, Snapchat does not come without controversy.
Recently, Snapchat has fallen victim to a hacking scandal. 4.6 million usernames and phone numbers were posted to the site SnapChatDB.info, The Street reports . The malicious site has since been taken down, but the security breach has worried potential IPO investors. The hackers exposed a weakness in the "Find Friends" tool of the app, which was seemingly ignored by company executives after it was pointed out by Australian company Gibson Security.
Because of its ephemerality, Snapchat has constantly been associated with 'sexting', a news topic that garners wide public attention whenever reported on. To some, the app is a perfect tool for sexting, as any inappropriate content quickly disappears. Because this issue is not new for the company, Snapchat will have to develop a strategy to conquer this inevitable issue.
Also recently announced was the departure of revenue boss Mike Randall 7 months after joining Snapchat. He is not the first executive to leave after a brief stay; Peter Magnusson, who was the VP of Engineering, left the company last summer after a 6 month stint. As an IPO conversation continues to circulate, Snapchat must make sure not to lose any other of its high-ranking executives.
Final Thoughts
An IPO for Snapchat would be a great thing. Like other high-profile IPOs for this year, Snapchat has molded itself as a company for the digital age and technology-grounded economy; its primary demographic, smart advertising strategy, and ephemeral business model makes the company quite the IPO catch ( See also: Will Uber Be the Hottest IPO of 2015? ; Is Pinterest a Top IPO Candidate for 2015? ; Is Airbnb a Strong 2015 IPO Candidate? ).
Also, its valuation would most definitely spike even higher, putting the company's potential worth at an amazingly high price.
However, Snapchat must seriously evaluate all of its existing controversies. They will also need to generate substantial revenue in order to present a compelling IPO investment rationale.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
