Multi-million dollar valuations without a business model. Why?

3 min reading
Multi-million dollar valuations without a business model. Why?
Multi-million dollar valuations without a business model. Why?


Snapchat is an application that lets you send messages, pictures or videos that self-destruct after a few seconds after being seen. It doesn't seem a bad idea but it doesn't seem to be like a license to print money either. Well, it must have something when Facebook and Google might have been willing to pay 3 or 4 billion dollars, respectively, to get it.

The ephemeral messaging app has come to join the ranks of startups that have achieved a value of hundreds of millions or billions of dollars without providing profits or even any income. These companies include Instagram, by Facebook for billions of dollars without even having a revenue source; Tumblr, by Yahoo for an even higher figure when it was about to run out of money; or Pinterest, the latest funding round of which values it at 3.8 billion dollars without having profits behind it to justify this figure. But the list is much longer: WhatsApp, YouTube, FriendFeed, Zite, GroupMe, TweetDeck, etc.

It's not always the case, but having a lot of users seems to be the common denominator in these types of operations in which small companies are valued at large numbers without a source of revenue behind them. Snapchat is one of these types: no business model but it has users. Even more importantly, it has their attention. And you can always make money from attention.

Draw attention first, make money over time

Applications and services such as Snapchat have more than one way to get returns from all that attention that they attract. The most obvious is publicity, either through customized ads, Facebook style, or with messages or sponsored content, Twitter style. More than one brand would be very interested in reaching those millions of users, especially when the population segment is usually as juicy as American youth.

Other choices are to raise revenue directly from users. A subscription model is always an alternative to consider. WhatsApp seems to have managed to attract money with a very cheap fee of one euro a year that, so far, has enabled the company to stay afloat without another apparent way of earning revenues. A similar approach is offered by the freemium model: free basic services or with limitations and other more advanced or complete features after passing through the check out. This is the model par excellence on the Internet in recent years, although it is yet to prove its profitability; just ask Spotify.

If the above fails, you can always try to generate revenues through in-app” sales. Messaging services like Line seem to have demonstrated that it is possible to obtain a decent amount of money by selling emojis or stickers to its users. The idea could be easily replicated by Snapchat and perhaps the most likely to try through the declarations  of one of its founders.



But aside from the above there is another way to obtain returns from all that attention generated: being bought by a large company. The idea is to accumulate so many users that makes it impossible to ignore you. Thinking directly of a multi-million dollar "exit". For some, many investors and entrepreneurs are not interested in building large viable businesses in the long term. By contrast, they are seeking to make startups able to generate enough hype and high valuation to achieve a sale or IPO to make them huge profits.

The paradox occurs that not having a defined business model is anything but negative for some startups. Obtaining revenues may end up being a trap and pose major difficulties for obtaining new investments. This is because when there is no revenue, there are no tangible numbers entering in the company's valuation and its supposed future value becomes pure speculation. In these cases the lack of a business model serves toward the goal of investors, who can give any value to a company without there being any figures to cast doubt.

Either one way or another, these kinds of multi-billion dollar valuations of startups without apparent business models are not mere eccentricities of Silicon Valley. Either one way or another, the attention and accumulated users may end up reporting large profits, but it doesn't always occur. In the case of Snapchat, and the rest, only time will tell if their valuation is justified or not.


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