In the meantime, however, its evident that Snapchat’s spectacular valuation rise is not about how to discount the potential value stream from monetizing dirty pictures. Instead, it reflects the crazy dynamics of late stage financial bubbles. And on that score, Wolf Richter has hit the nail squarely on the head, as usual.
As he explains in today’s post, Snapchat’s spectacular valuation run-up is just a new and more sophisticated form of “pump and dump”. In this instance, the venture capital firms involved have apparently invested trivial amounts of chump change in the two recent funding rounds in order to peg dramatically higher paper valuations in preparation for an imminent IPO. In numeric terms they have invested less than $30 million since last November, meaning that they have been able to leverage an $8 billion valuation gain at a ratio of 266:1.
By strategically deploying less than $30 million, KPCB, and DST Global before it, have ratcheted up Snapchat’s valuation from $2 billion to $10 billion. With the stroke of a pen, in a deal negotiated behind closed doors, they have created an additional $8 billion in “wealth” that is now percolating through the minds of employees with stock options and through the books of the early investment funds.