Will Snapchat Make it to the Billion-dollar Club?

Edited By Vani Rao

Possible funding by Alibaba Group to value the company at $10 billion

Snapchat Inc., the maker of a mobile application for disappearing photo messages, is in talks with investors including Alibaba Group Holding Ltd for funding that may value the company at $10 billion, according to Bloomberg. On completion of the possible funding, Snapchat would join an elite group of technology startups with a valuation of over $10 billion. Snapchat’s mobile application enables users to send photos and messages that vanish within seconds of being read. The valuation of about $10 billion is more than three times the price that Facebook Inc.’s (NASDAQ: FB) CEO Mark Zuckerberg was willing to pay last year.

Facebook had tried to buy Snapchat for $3 billion last year and started its own visual messaging app Slingshot on June 17, 2014 to Social-Media-buttonsend ephemeral photos and videos, after the deal fell through. Snapchat, in only one year of its existence, is used by one-third of US teens. Moreover, about 10% of teens globally are using Snapchat. In May 2014, Snapchat updated its app to include video features, following which users can enjoy live video calling as well as text-based conversations, joining the crowded mobile messaging market. Snapchat’s popularity has continued to grow, with people sending more than 700 million disappearing “snaps” a day and more than 500 million stories viewed daily, according to the company.

It is pertinent to note there that companies including house-sharing app Airbnb Inc. and file-sharing company Dropbox Inc. have raised funds at $10 billion valuations. In June, car-booking app Uber Technolgies Inc. raised $1.2 billion at a record-breaking valuation of $17 billion.

What’s in it for Alibaba?

While Snapchat would benefit from the high valuations as a result of the funding, Alibaba, China’s biggest e-commerce company, would enhance its presence in disappearing-message technology that becoming increasingly popular among the youth. More importantly, it would gain a firm foothold in the US, where it is planning an initial public offering (IPO) in the coming months.

In a run-up to its much-awaited IPO, Alibaba is building its presence Alibaba-Logoin the US and has decided to list itself on the New York Stock Exchange (NYSE), it said on Thursday, June 26, 2014. Alibaba, which handles more than 80% of online retail transactions in the world’s second-largest economy, will list under the symbol “BABA,” the company said in its updated IPO prospectus. The Chinese company is expected to make its debut this summer in what could be the largest US tech IPO. If it sells off a roughly 12% stake in the company, it could raise as much as $20 billion. That would make it the largest IPO in history, ahead of Visa Inc.’s (NYSE: V) $17.9 billion market debut. Alibaba would be the largest Chinese company to list on US exchanges by far, with an estimated valuation north of $200 billion.

Last year, Alibaba started a US-based fund to invest in e-commerce and emerging technologies, led by Michael Zeisser. In April, the Hangzhou-based company led a $250-million financing round of ride-sharing app Lyft Inc. In October, it led a $206-million investment in ShopRunner, a subscription-based shipping service for US retailers, as well as a $50 million investment in Quixey Inc., a search engine for mobile apps, and messaging app TangoMe Inc.

Is the Huge Valuation Justified?

Snapchat, founded in 2011 by Evan Spiegel, has already raised more than $100 million of financing from investors including Lightspeed Venture Partners, Benchmark, Institutional Venture Partners, General Catalyst Partners, and SV Angel. While the Los Angeles-based company has plenty of users, it is still in a growth phase. Spiegel has recruited executives from Facebook and Google Inc. (NASDAQ: GOOG, GOOGL) to join Snapchat. There is no doubt that the funding would enable Snapchat to build its business and enable it to gain the technical ability to do this.

One wonders whether Snapchat deserves a $10 billion valuation since it is in the early stages of building its business and makes little to no revenue. However, the company has huge growth potential due to its fast growth of its user base; while Snapchat handled 200 million “snaps” daily in November, this number had jumped to 700 million by May. Snapchat is mainly targeted at the teens and young people, who are quick to adopt new technologies. The startup is also made its foray in the field of digital messaging and competes with companies like WhatsApp Inc.

However, Snapchat is still faced with some concerns that it would have to deal with going forward. Last year, a large number of users expressed concerns that Snapchat’s built-in friend-finding feature could be used by hackers to discover users’ phone numbers through its address-book-lookup tool. This could expose users’ information to advertisers and spammers. It remains to be seen how Snapchat will effectively use the funding to address these concerns and increase its platform and user base in the future.

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