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Snapchat Doing Great, Still Not Profitable: The Weird Economics of Startups

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Yesterday Gawker's Sam Biddle published the article "Snapchat Lost a Ton of Money Last Year," which is based on leaked financial documents concerning Snapchat's financial health over the year 2014. The article isn't very good: Biddle goes a little too far with his Gawker-ish schadenfreude-without-the-shame thing and gleefully gloats over how little the company made last year: $3.1 million, with a $128 million loss. (In case you wanted to know Gawker's throughline on this, the article is headed by a gif of a Snapchat ghost-thing pooping a continuous stream of money. So there's that.)

For a more sober summary of the same information, Business Insider's Alyson Shontell, in "Snapchat generated only $3.1 million last year," has a just-the-facts analysis that provides the same figures with much less bloviating. A big part of Snapchat's down year in 2014 was that the company didn't even attempt to make any money until October. As is the habit of many startups, both successful and not, audience size and growth of service were the main priorities, with revenue becoming a focus only after industry cache had been achieved.

This late-in-the-game attempt at making profits (along with its high-priced and lucrative 'Discover' advertising option not being rolled out until very early this year) makes it very hard to ascertain exactly how valuable Snapchat, or any company like it, actually is.

For example, Snapchat was valued at $3 billion when Facebook tried to buy it out in 2013. A $3 billion valuation holds the strange position of being incredibly low for an app so popular among a very valuable marketing demographic (Snapchat it has told investors its value is in the $15-$16 billion range). But $3 billion also seems incredibly high for a company that is very young, has a problematic amount of executive turnover, hasn't really made any money, has only recently started trying to make money, and doesn't actually produce anything tangible or sell anything more substantive than advertising space.

Because it's the internet, and traditional markets don't know how to accurately valuate anything digital, you end up with none of the numbers making any sense, or at least not making any common sense. Snapchat could be the next Instagram, or it could be the next Foursquare. No one really knows, and anyone who says they do is overconfident.

Snapchat does have about $300 million in cash-in-hand just kind of sitting around, which could pay off the remainder of my student loans roughly twenty-three-thousand times, in case you were wondering.

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