Why zero-revenue companies can be worth billions
In a recent blog post, Fred Destin of Atlas Ventures (again) added sanity into the discussions about why zero-revenue companies can receive valuations of many billions of dollars.
I agree with everything he said. There's one more point I'd add: Large scale audiences have a valuation-per-engaged-user.
Facebook, Twitter, and LinkedIn all started out as zero-revenue companies. But after they achieved the scale and level of ongoing user-engagement that they have today, the smart management teams started inserting various ways to monetize the engaged users. The methods vary; but at some point, they added them.
Once monetized, these companies know how much revenue/user they can generate in a month. See this discussion (based on monetization in the Oct. 2013 timeframe). So, do some sample math:
- $2/user/quarter ($8/user/year)
- 50 million unique users (just above Fred's Daily Motion example)
- = $400 million / year revenue revenue potential
- Valuation of 20x earnings (Facebook's current valuation)
- = $8 Billion valuation for a 50 million user installed base
We don't know how many uniques Snapchat has, though estimates exist. But the point of this post is not to defend Snapchat's valuation in particular.
Instead, it is to show how a big valuation can come to be, even though there is zero revenue in a company - now - and why Snapchat might have said No to a $3 Billion acquisition offer.