Snapchat made headlines last November by reportedly turning down a $3 billion acquisition bid, which left digital armchair quarterbacks everywhere questioning the decision. For a company with no revenue and uncertain long term prospects, taking the money would’ve been understandable. Recent reports that Snapchat is raising new funding at an even more eye-popping $10 billion valuation suggests that maybe they were aware of something about their success that the broader market had yet to realize.
The three leading companies in the social media sector – Facebook, Linkedin and Twitter – are worth nearly $250 billion combined. What makes many social media companies so valuable is the power of the network effect to deliver highly engaged audiences at scale, which translates into the opportunity to monetize through high volumes of ads and other high-margin products. The network effect can be very powerful but is also very difficult to achieve, which is perhaps why many considered Snapchat a risky proposition a few months ago. Is it possible that the Snapchat founders already knew what the rest of the market didn’t, that the network had already reached important critical mass thresholds that predicted even greater expansion of its audience?
Back in November, Snapchat’s audience penetration among smartphone-using adults was 12.1 percent, which is a respectable number indicative of a company with serious potential but that has not necessarily reached critical mass within the broader population. For perspective, in the Social Media 1.0 era, Facebook and Myspace both began to see their user growth accelerate once they reached 15-20 percent market penetration. So while Snapchat was well on its way to reaching that level last Fall, long term success was certainly no guarantee. However, deeper analysis on Snapchat data also showed that within certain predictive segments of the population – specifically among 18-24 year olds – Snapchat was already well past the typical critical mass threshold and accelerating rapidly. 25-34 year olds, another important demographic segment was just starting to break out and reach double-digit penetration.
Despite Snapchat’s relative novelty, it has already established itself as one of the most highly used apps among Millennials (18-34 year olds) at 32.9 percent penetration, trailing only Facebook (75.6 percent) and Instagram (43.1 percent) among smartphone users. At this reach threshold, Snapchat has likely established a certain degree of staying power within this demographic segment that gives it some runway to evolve beyond its core value proposition.
Long term success in the social media sector is no given, and there are certainly several examples of companies that have both ascended into the stratosphere of successful tech companies and of ones that are no longer relevant. Achieving critical mass is an important step in eventually reaching the winner’s circle, and with Snapchat currently at 18 percent penetration among smartphone-using adults it would appear to be right in that sweet spot. If usage begins to accelerate significantly from this point forward, who knows how big it can eventually get?