Snapchat Valued At $3 Billion? Utter Silliness

Dropbox is raising another $250 million to complement its $312 million cash hoard, as reported by Businessweek's intrepid Ashlee Vance. While the $8 billion valuation is double what it got last year on its previous $250 million raise, it may not signal the bubble that many fear. After all, Dropbox actually has significant sales—$116 million in 2012, according to The Wall Street Journal—and is moving into the more stable cash territory of enterprise computing.

But Snapchat turning down $3 billion from Facebook on sales of $0.00? That's either a bubble or outright foolishness. Or both.

Dropbox Gets Down To Business

While Silicon Valley VCs tend to favor the consumer-oriented technology they more readily understand, enterprise buyers tend to provide a more stable, long-term source of revenue. Hence Dropbox's move into the enterprise with Dropbox for Business bodes well for the company's sustainability. Consumer startups burn bright and then flame out on the whims of fickle consumers—MySpace, anyone?—but enterprise technology companies tend to take longer to build and once they hit their inflection point, they tend to stick around (IBM comes to mind).

This why rich valuations for enterprise-facing startups like Box, Workday and Cloudera don't trouble me. Each of these companies pulls in real revenues from a customer base that is reluctant to rip-and-replace. To be sure, this is also one of the problems with enterprise computing: it gets loaded up with all sorts of legacy cruft that makes future technology purchases hard. 

But on balance, Vance is right when he highlights the fact that "Dropbox ... makes something customers want—and is able to sell that something for actual money." This turns out to be a very big deal.

Snapchat Gets Down To ... Something

And then there's Snapchat. The company makes exactly $0.00 with a service aimed at cash-starved teens that want to take ephemeral pictures of themselves and share them with friends. If you're wondering how this could possibly turn into revenue, you're not alone. 

Roy Murdock, for one, makes a compelling (and long) case that Snapchat is intrinsically worthless. No teen (or anyone else) is going to pay for the service directly, so this leaves Snapchat to rely on advertising. However, Snapchat, by design, deletes the very thing that advertisers would advertise against mere seconds after they're shown. 

Sounds like a winning business model, doesn't it?

In Sillycon Valley land, however, one needn't always have a business model. Being popular is enough. At least, it's enough so long as the venture dollars keep flowing.

Or until you get bought. For example, for years people have talked about how easy Instagram or Pinterest could monetize their big user bases. And yet they don't. This could be because they're run by geniuses. Or it could be because making money from customers is much harder than taking money from VCs.

Or, as Yelp CEO Jeremy Stoppelman tells it, "When we chose that independent path [instead of selling the company], for me that was like, ‘All right, it’s go time, I’m going to have to be a real C.E.O.’"

Real Companies Make Money

So long as VCs want to give hefty valuations to companies that actually make money, there's at least a semblance of sanity in it. Dropbox at $8 billion? That's rich, but probably not bubble-esque.

It's only when we see VCs dumping money and sky-high valuations on companies that make little to no money that we're in danger of repeating the mistakes of the dot-com bubble. Many of today's bubble-worthy entrepreneurs were in elementary school during that period of madness, so they won't appreciate the signs that indicate a swelling and then the bursting of a bubble.

But here's a key: if you can't make money, you're either going to have to sell to someone that can monetize your asset, or you need to get used to failure. Because the real world requires you pay in cash, not VC silly money.

 

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