Why is Snapchat so Valuable?

As a teenager, I would jump at the chance to borrow someone’s camcorder.

I’d assemble as many friends and props as I could (generally toy weapons), and head out into the wild to make horror, martial arts, or cowboy movies.

These movies had little semblance to anything other than a bunch of teenagers acting like teenagers in front of a camera. We never wrote scripts and we never worried about good sound or lighting – we just played with our ideas.

Sometimes these ideas included trespassing and property destruction. One even involved a rather sizable explosion with homemade Potassium Nitrate.

Despite our lack of direction, all these movies shared a common theme: behavior we’d grow to find mortally embarrassing in just a few scant years. What we once thought were brilliant and innovative ideas had shelf lives of about two years before they became curses that we wished we’d never made.

Fortunately, not many people saw those tapes.

Today, kids have tools a thousand times more powerful than we had, and the ability to publish what they make to everyone they could ever meet in the entire world. The potential for humiliation is immense, and there isn’t much room for adolescent identity development.

This is why social messaging service Snapchat exists. Inside the app, young users can post whatever brilliance they’re feeling, and it won’t come back to haunt them down the road when it turns out it wasn’t actually brilliance at all.

In two years, Snapchat has grown immensely popular among the 13 to 25 year old demographic who share and untold number (maybe millions?) of “snaps” per day. That is, they share photos, videos, drawings and messages that are deleted immediately after being viewed. In the basic sense, it’s just having a group chat on Facebook that deletes itself like it were part of Mission Impossible.

How popular is it? It is currently the 12th most popular Free iPhone app. That places it above all its competitors: Facebook Messenger, Twitter, Kik Messenger, WhatsApp, and Skype. It’s the 10th most popular Free Android app as well, placing it ahead of its competitors there.

Now, Snapchat is looking to raise $200 million at a valuation between $3 billion and $4 billion.

Of course, it’s faced with a problem common to social media services: it doesn’t know how to make any money yet.

Testing the waters

Last June, Snapchat closed a round of Series B capital totaling around $75 million. That round was led by Institutional Venture partners and included General Catalyst Partners and SV Angel. In that round, Snapchat was valued at $800 million.

Now the company is reportedly in talks to obtain another round of funding, but this time the valuation has been said to be around $3.6 billion. This is with only the faintest outline of a monetization strategy.

After the last funding round, Snapchat CEO Evan Spiegel hinted to the media that in-app purchases could be the key to opening Snapchat’s revenue stream.

South Korean social messenger Line, for example, generated nearly $30 million in the second half of 2012 by selling premium emoticons to its users. Snapchat could develop new features for its mobile application, and then make them available as a “click to buy” premium within the application.

It’s a solid potential approach. Market research firm Gartner predicts that in-app purchases will amount to $26 billion in 2013, and that 48 percent of all revenue earned by mobile applications will be from in-app purchases by 2017. If Snapchat can come up with a few desirable additional features, young users could easily be enticed into shelling out small sums of money.

In the first week of October, the company debuted a new feature called Snapchat Stories, a method of combining shared pieces of content into a single “story” that is visible to all of your followers for 24 hours. It’s social broadcasting akin to the Facebook Timeline.

With the debut of Stories, Snapchat shared some of its first bits of “sponsored” content: videos and music for Los Angeles bands that linked to iTunes from the user’s inbox. Like other snaps, these items disappear but instead of only being visible just once, stories remain accessible for 24 hours.

It’s still not certain if the comments from Spiegel about in-app purchases and the music experiment are going to tie together in a comprehensive monetization strategy for Snapchat.

One thing is certain, the billion-plus valuation is worthy only of the ideology of Snapchat, not its potential to make money.