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Snapchat – Silicon Valley Has Two Rulebooks

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Buy me. I’m really useful.

Snapchat, the insta-messaging sensation, has just raised another wedge from some of the biggest names in Silicon Valley VC. By my reckoning it’s got 20 mill in its war chest.

Created by a clutch of students at Stanford who jaunted over to Sand Hill Road to pick up their pot of gold, it’s a cultural concoction of dubious distinction and a time-suck at my kids’ school. It would seem to have a monetization model that consists entirely of being sold to one of the SV giants ( because if the message is up for 10 seconds max, I’m guessing not too many advertisers will expect the user to dwell too long on their lower third. ) But no matter, the VCs who invested in it were impressed by the team and saw the potential of a good exit to some of their friends and slapped down their dough to buy the user base and flog it at a profit.

This seems like a classic case of the SV Country Club in action. If you’re connected, and if you’re smart enough to get into Stanford, the fact that you have zero monetizing potential or long term revenue stream outside a flip means nothing. The fact that your app has been cloned by Facebook in a matter of days and has zero protectability means nothing. The fact that it’s already deeply hackable means nothing. And let’s not even start with its clear ‘sexting’ potential, and the legal quagmire that promises.

But if you’re not connected, or didn’t go to the right school or come from the right town, you have to go through every hoop known to man to raise a small seed round. You have to pitch in front of people you don’t know, all looking for a way to bounce you out of the room, you must face every hard question you can imagine and be expected to have all the answers in ten seconds flat, you must have solid numbers, a clear roadmap, and a revenue model that stands up to the test of time, just to raise a tiny fraction of the cash that SnapChat commands.

And that is the way it should be. That is due diligence. That is rigor. That is discipline.

There should be no free rides in this game. Connections should only get you the meeting. They shouldn’t deliver millions just because you went to the right college in the right town. I have no illusions. Life isn’t fair, but for an industry that prides itself on pure market capitalism and a level playing field, this sure smells like crony capitalism to me.

In this case, what’s being traded is users for a free application. Indeed one of the guys at Benchmark, who just funded Snapchat for its Series A, characterized teenage users of the free app as “customers”. That’s a novel use of the term customer. Call me old fashioned, but I thought it involved some kind of monetary transaction. I doubt the teens using the app regard themselves as customers unless they’re buying a slurpee.

It all leads to a horribly queasy feeling. ¬†For “users”, read tulips in seventeenth century Holland. This has all the makings of a consumer tech bubble. The value of users drops over time as people are unable to turn them into “customers”.

I may be wrong. Perhaps SnapChat has a master-plan that can help it be profitable without an exit. If that’s true, I’d really like to hear it.

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Written by coolrebel

February 9, 2013 at 9:08 am