Snapchat’s complete inability to make money is the reason it’s worth $800 million

Simplicity was key to Instagram’s popularity—and it was a direct consequence of the company’s refusal to think about how to make money from the service.
Simplicity was key to Instagram’s popularity—and it was a direct consequence of the company’s refusal to think about how to make money from the service.
Image: AP/Marcio Jose Sanchez
We may earn a commission from links on this page.

The parallels between Snapchat, the photo-centric social media darling of Silicon Valley that is now valued at $800 million, and Instagram, which Facebook acquired for $1 billion (ultimately $715 million because the value of Facebook’s stock fell) are uncanny. Here’s the rundown:

  • Instagram had 16 employees when it was acquired. Snapchat currently has 17.
  • Both companies were founded by Stanford classmates.
  • Both experienced explosive growth: In two years, Snapchat has probably reached around 200 million photos shared, while Instagram reached 4 billion photos shared within its first two years.
  • Instagram was acquired by Facebook after being courted by Mark Zuckerberg himself, and Zuckerberg is rumored to have taken an intense personal interest in Snapchat.
  • Neither company has any sources of revenue at all.

It’s that last bit that’s the most intriguing. In a May 2012 interview with Fast Company, Adrian Salamunovic, CEO of CanvasPop, which turns photos from social networks into physical prints, talked about how Instagram CEO Kevin Systrom resolutely ignored opportunities to make money from Instagram, concentrating instead on making the experience as good as possible for users.

“We really harassed him, the poor guy. But he was always very cool about it—always supportive. […] It was never, ‘How can you help me make more money?’ Honestly, revenue seemed to be the last thing on his mind. Maybe that’s why the product is so authentic.”

This, despite the fact that by integrating with CanvasPop, Instagram could have probably started generating millions in revenue virtually overnight.

Compare Instagram CEO Systrom’s unwillingness to think about anything other than growing his user base by creating a great product to these words from Evan Spiegel, head of SnapChat.

“We really admire the folks at Facebook and Twitter,” Spiegel said. “But one of the reasons we’re in Los Angeles is to avoid looking over our shoulder at other companies like these. We’re heads-down right now.”

That said, Snapchat just hired a “VP of monetization,” Philippe Browning. Spiegel did not get specific about what Browning will be looking into, but he said that possibilities include “in-app transactions” and “native advertising.” Spiegel has also said that at present he is ignoring any potential acquisition offers from the likes of Facebook.

But both the rejection of acquisition offers and the hiring of a VP of monetization could ultimately prove to be a mistake for Snapchat. It’s not clear that Instagram ever would have generated enough revenue to justify its billion-dollar valuation as a standalone company. A billion dollars is just what Instagram was worth to Facebook, which can probably get more value from the company than Instagram could create on its own, both by re-purposing Instagram’s user data and by using Instagram as a unique vehicle for high-value video advertising.

Given the parallels between Snapchat and Instagram, it’s hard to see how a revenue-free company like Snapchat could be anywhere near an $800 million valuation were it not for the precedent of Instagram (and, some would argue, YouTube before it). Absent being acquired like Instagram, and with the constant pressure to eventually turn a profit, it’s hard to see how Snapchat could maintain that valuation for the long term. There’s a larger point here about how many consumer-facing web startups currently operate: Get big fast, get acquired, and let someone else sort out the revenue side.