Snapchat’s Huge Windfall : The State of Web 2.0

Looks like my 2014 prediction of Snapchat, originally valued at $4 billion, being worth $30 billion by 2016 is coming true.

This talk of bubbles reminds me of 2007 when everyone, including all the experts, was certain Facebook was a bubble at a valuation of $15 billion after Microsoft invested; now it’s worth $200+ billion. Then in 2012 after Facebook’s hugely publicized botched IPO and Nasdaq error, all the experts again said the web 2.0 bubble had burst; the stock price and earnings have since doubled. Unlike the big blowups of Friendster, Myspace, Digg, etc..these post-2008 web 2.0 valuations have proven to be extremely sticky. Pinterest, Twitter, Dropbox, Air B&B, Tinder, Snapchat, Whatsapp, Uber, Instagram…all keep going up with no end in sight, year after year until either IPO (which finally creates volatility) or buyout. One mistake a lot of forecasters make is assuming that a steep ascent in an asset price must terminate with an equally steep crash (); anther overlooked but quite common outcome is things stay flat, which is what we’ve seen with many of these large web 2.0 valuations one they have reached maturity. An example is Twitter, which plateaued at a valuation of around $8-11 billion from 2008 all the way until its IPO in late 2013. And then Faebook, which hit a plateau of around $100 billion from 2011 until its IPO in 2013. There’s hardly any big failures or blowups, except perhaps Zynga and Groupon (although it’s still worth $5 billion).

My prediction is these web 2.0 valuations will keep rising for many years to come because that is the path of least resistance, and the investor demand and user growth for these companies is seemingly unquenchable. The unending web 2.0 boom and unending wrong predictions about its demise show how these ‘obvious’ parallels to the old tech bubble of 1995-2000 are just so wrong. There’s more at play here, such as the investor flight to quality (more money chasing fewer companies), huge user growth, huge monetization potential from smartphone engagement, the very large millennial population that use these services, and ability of these web 2.0 companies to carve out niche dominance and then keep it.

To understand the fight to quality, which we also are observing in the post-2011 US stock market, think about it like this: A VC firm has $x in assets. The historic market return is 7%. The firm can plow this money in to a guaranteed winner like Snapchat or Uber and make 100-300% within a couple years – up to 20x times the typical market return. Or they can divvy the money into dozens of smaller companies, of which one of them may become the net Uber, but the expected value of later allocation is actually less than the former strategy. Why gamble on scratchers when you can play an all-black roulette wheel. Because of risk-averse VC firms, many start-ups are turning to crowd-sourcing sites like kick-starter.

In 2012 when the left was certain Facebook’s mobile usage would cannibalize its highly profitable desktop-based advertising revenue, I correctly predicted that mobile usage would supplement desktop usage, not supplant it, because people would simply spend more total time online, switching between the desktop when at home and the mobile device when on the go. Total internet time has nearly doubled between 2010 and 2013 and desktop usage has remained constant.

As recent earning reports from Facebook have shown, making money from mobile users is not a problem:

An overused argument by the left is that successful web 2.0 companies like Facebook and Snapchat can be undone by a shrewd competitor, but this is easier said than done, especially in a market that is as saturated as social networking. A ‘this time is different’ argument can be made in that when Myspace was popular , social networking was an emerging industry and any company had the opportunity to seize and solidify market share. Facebook sized upon Myspace’s weaknesses and gained permanent dominance when social networking as an industry matured. The left predicted Ello would give Facebook a run for its money, but it faded – like all Facebook competitors past and present – as quickly as it emerged, and all that VC money spent on ill-fated AstroTurf PR campaigns about how Ello was the ‘not new thing’ – wasted. You saw similar ‘winner take all’ coalescence in the 80’s with personal computers and operating systems, and again in 90’s with search engines. Lycos, Yahoo, Alta Vista, Web Crawler, and Ask Jeeves were all supplanted by Google, which has remained on top ever since. Same for Microsoft; decades later Windows is still the uncontested market leader, with alternatives far behind. Another analogy is the formation of the solar system where initially you had a lot of chaos and dust, but after a few hundred millions years everything solidified into planets and has remained the same for billions of years.

Within the next year or two, we’re probably going to see Uber being worth $100 billion before IPO, Snaphat $50 billion, Tinder $10 billion, Air B&B $50 billion, etc. Take every present valuation and quadruple it. Back in the 90’s, $100 million was a big deal; now that’s just a rounding error or the equity of just a single early employee. Insane, but very prosperous times we’re living in. And it’s got a long way to go.