Snapchat’s strategy: 1) raise billions of dollars 2) ??? 3) profit

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Image: Lili Sams/Mashable

Remember when people mocked the idea that Facebook would be willing to pay $3 billion to buy Snapchat? Those were the days.

Snapchat confirmed in a filing on Thursday that it has raised another $1.8 billion (yes with a “B”) in funding. The startup’s valuation, with that new capital included, is reportedly hovering around $20 billion. 

The ever increasing valuation may be what grabs headlines (though it’s less crazy if Snapchat is really on the cusp of generating $1 billion in annual sales), but it’s the vast amount of capital now in Snapchat’s snapbank account that really deserves more attention.

Snapchat has now raised $2.6 billion in funding in the five years since it was founded, according to data from CrunchBase, a startup funding database. That is actually slightly more private capital than the $2.4 billion Facebook raised over an eight-year period before its 2012 public offering. 

So what exactly does an app still most famous for goofy (or NSFW) selfies and funny filters need with more than $2 billion? 

Snapchat, typically tightlipped about its business plans, declined to comment for this article, but here’s some shameless speculation from having covered the company.

Good #content ain’t cheap

You may think of Snapchat as simply a messaging app, but that’s not how the team at Snapchat thinks of itself. 

“We have two major businesses. One is communication, and the other is entertainment,” Imran Khan, Snapchat’s chief strategy officer, said in one interview last year. Evan Spiegel, the company’s founder and CEO, didn’t even hedge when asked to define Snapchat at a tech conference around the same time: “Call us entertainment.”

And not just “entertainment” involving playful filters and doodles. 

Leaked documents from the 2014 Sony hack revealed Snapchat’s interest in having a record label. Snapchat has premiered its own original video series. It also continues to work closely with major media outlets on original stories published in its Discover tab, of which Mashable is a member. (If you want a good sense of Snapchat’s media ambitions just look at its board of directors, which includes the CEO of Sony and the editor-in-chief of Cosmopolitan.)

Snapchat clearly has its eye on premium entertainment content to put in front of its more than 100 million daily users. Buying or creating that content does not come cheap. 

Image: AP Photo/Jae C. Hong

Talent isn’t cheap either

With so many billion-dollar startups and large public tech companies flush with capital, the competition for top talent in Silicon Valley has never been more fierce. 

Snapchat is known for dishing out very generous compensation packages to attract employees. Recent Stanford graduates are said to get six figure paychecks and $300,000-$400,000 in stock grants. So just imagine what other more experienced employees get. 

The startup has poached executives from Google, Facebook, Instagram, Credit Suisse, BuzzFeed and more. Their pay packages likely put the generous Stanford student compensations to shame. 

Acquisitions are fun

That barfing rainbow effect you love didn’t come cheap. 

It’s the result of Snapchat buying Looksery, a startup that developed real-time face detection and effects. The price tag for that acquisition was rumored to be $150 million.

Earlier this year, Snapchat bought Bitmoji, a popular service for creating personalized emoji, for a reported $100 million

These features may be playful, but Snapchat has shown it is willing to commit serious money to own whatever the hot new communication feature is to stay competitive.

Part of how Facebook has maintained its dominance for so long is by using its cash pile to buy up would-be competitors like Instagram and WhatsApp. If Snapchat is really intent on building a longterm, standalone business, it may end up having to commit even more money.

Money is free (for now)

Snapchat, even more than many of its billion-dollar startup peers, has been remarkably successful in raising lots of money without having to give the usual concessions to investors. 

Not to oversimplify here, but: venture capitalists and mutual funds are basically handing Snapchat huge wads of cash with little downside. So why not just take it?

Slack, Automattic, Taboola and other billion-dollar startups are currently choosing to sit on much of the money they raise, just to have it in the bank in case the market takes a turn for the worse. Snapchat may well do the same.

Social media is fickle. Having some extra cash is a good insurance policy in case Snapchat needs to acquire an emerging competitor or make a pricey pivot to the next, next big thing.

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