From sexting to sponsored filters: the rise of the $20b social media behemoth

Photo credit: TheStrangeDanishDude via Imgur

I am a millennial. I am supposedly born with an innate ability to keep up with the latest social media trends. Even so, I have never fully understood the allure of Snapchat. When I told that to my friends and colleagues after downloading the app last year, most of them gave me a dirty look, as if I just sent them and their parents some nude photos of myself. Well, at least to most of us, it was known as the app tailored for crude photo enthusiasts and lovers who want to sext without leaving traces behind. But how wrong were we.

Earlier this week, it was reported that Snapchat had just raised $1.8 billion in its Series F round at a valuation as high as $22.7 billion. Their investor lineup includes the likes of Sequoia Capital, General Atlantic, Fidelity, and IVP. While most of us 25-year-olds are suffering from quarter-life crisis, Evan Spiegel, CEO and cofounder of Snapchat, seems to be conquering the world one snap at a time.

Upon researching about Spiegel, I was extremely intrigued at the way he runs Snapchat. Reading about the history of Snapchat makes me wonder if Spiegel is either clinically insane or intelligent beyond measure. To say the least, not every 23-year-old has the guts to reject a $3-billion buyout offer from Facebook.

I understand that rainbow-vomiting filters, face swapping and live vlogging is fun, but Snapchat is no run-of-the-mill startup.

The business is simply mind boggling. Firstly, the social network has a relatively limited reach in terms of user demographic (nearly 80 percent of all daily active users are from North America and Europe), and secondly, while it relies on advertising as its main source of revenue, it neither has an analytics reporting solution nor do they sell their own ads. How did Snapchat become the $20 billion behemoth it is today?

Reading about the history of Snapchat makes me wonder if Spiegel is either clinically insane or intelligent beyond measure.

In an investment deck dated late 2015, Snapchat’s revenue in 2015 stands at $59 million. That may not sound like much, but it is worth noting that real monetisation strategies kicked in only in the later part of the year. The company is confident in its revenue growth; it estimates revenue to rise to between $250 million and $350 million in 2016, and between $500 million and as much as $1 billion in 2017.

So, how is Snapchat going to make that much money, you ask? Unlike Facebook, Google and Twitter, Snapchat sets a grossly high bar for advertisers to join the platform. For upward of $750,000, brands get to run their ads on the app for one day. In comparison, it will only cost you around $1.1 million to buy advertising space at Times Square and flash your ads on huge high-definition screens for an entire year. It is also reported that PepsiCo’s Gatorade division paid Snapchat between $500,000 and $750,000 for a video filter during the Super Bowl. Even buying time on its cheaper product, Discover, costs about $20 per thousand views. Ben Winkler, chief investment officer for the media communications firm OMD, puts it succinctly, “It’s like how the Kardashians are famous because they’re famous, Snapchat is expensive because it is expensive.”

#SB50 may be over but the #GatoradeDunk @Snapchat lens lives on with 100 million+ views! Get dunked today. pic.twitter.com/1b7FHwE7No

— Gatorade (@Gatorade) February 8, 2016

It may seem like Snapchat is banking on its novelty factor, but the yellow ghost has stats and street cred to back its swag up.

Advertisers and brands targeting millennials are willing to pay the premiums because Snapchat is showing the figures that are giving the biggest social networks a run for their money.

Even though Snapchat’s daily active users (DAUs) of 110 million as revealed in the investment deck is a far cry compared to Facebook’s 1.038 billion, the gold lies in the rate at which Snapchat has been growing. The platform saw almost 50 percent growth in DAUs within 12 months, jumping from 74 million users in December 2014 to 110 million users in December 2015. Snapchat revealed previously that about two-thirds of its users create content everyday. Given its tremendous growth rate, it will be no surprise if Snapchat has already surpassed the ailing Twitter as we speak.