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$10 Billion for Snapchat?!

Insider secret of how Wall Street works to part you from your money...
 
WE ARE sitting in the lobby of the China World Hotel in Beijing, writes Bill Bonner in his Diary of a Rogue Economist.
 
It is a very large space and very unlike most hotels. 
 
Monday, we stopped into the lobby of the Marriott Opera Ambassador Hotel on Boulevard Haussmann in Paris. Like most lobbies, it was quiet, with just a few people having coffee. 
 
Here, there are hundreds of people – almost all young. I am the oldest person, a fossil from another continent and another time. The young people are dressed casually but well. They sit in groups talking...as though planning their next marketing campaign. 
 
There is scarcely anyone over the age of 40. We have started a small publishing business in China. It, too, is staffed by people in their twenties. 
 
What happened to the old people? Maybe they have not been able to keep up with the breathtaking changes in China. This is no country for old men...
"Everyone has great confidence in the future," says a Chinese colleague. "Things have gotten so much better over the last 20 years. And we expect that to continue. 
 
"Our new president, Xi Jinping, is serious about trying to get rid of corruption, even at the highest levels. He is trying to deregulate whole industries. Regulations and licenses were just a way for officials to demand bribes and payoffs. So, Xi wants to get rid of a lot of this so we can do business more freely." 
Whether he will succeed or not, we can't say. But at least it sounds promising. 
 
The truth is we never know what will work. And here we take up an important subject: how you can invest intelligently in a world of ignorance.
 
It is so important and so weighty, it needs a real-world introduction. And it can be so tedious that we must offer you a reward for paying attention. 
 
Yes, dear reader, you will be the first to know about our new trading system. It's guaranteed – almost – to beat the market. But first, let us turn to the "Wolf of Wall Street" – financial commentator Wolf Richter, that is:
"It was leaked on Tuesday [of last week] by 'people with knowledge of that matter,' according to the Wall Street Journal, that VC firm Kleiner Perkins Caufield & Byers had decided in May to plow up to $20 million into message-app maker Snapchat, for a tiny portion of ownership. An undisclosed investor also committed some funds. The deal, which apparently hasn't closed yet, would give Snapchat a valuation of $10 billion.
 
"That's a big step up from November last year, when the valuation was $2 billion. At the time, the company had raised $130 million in three rounds of funding. By now that would be closer to $160 million, after it was also leaked that Russian investment firm DST Global had put some money into it earlier this year, boosting its valuation to $7 billion at the time, once again, "according to two people familiar with the matter."
 
"At a valuation of $10 billion, it joins the top of the heap: app makers Uber ($18.2 billion) and Airbnb ($10 billion), cloud storage outfit Dropbox ($10 billion), and Palantir, the Intelligence Community's darling ($9.3 billion)."
What makes photo-messaging app Snapchat stand out is that it has no business model...no revenue...and no profits. 
 
It has, as near as we can tell, a lot of young users who send photos to one another...often explicit in nature. These photos – known as "Snaps" – then disappear after a number of seconds. 
 
How can Snapchat monetize that? Who knows? 
 
Perhaps a better question: Why would a bunch of rich, rational money-grubbers at KPCB want to invest good money in Snapchat? 
 
We don't know. Maybe they know something we don't. Maybe they have a lot of this kind of inventory in stock? And maybe they believe that pumping up the whole sector will be good for business. 
 
What's their business? 
 
It is simple: Smart guys sell things to guys who aren't so smart. The pros unload onto the amateurs. Wall Street touts IPOs to mom-and-pop investors. 
 
Putting a little VC money into Snapchat...giving it a nutty valuation...is like bidding up odd paintings by contemporary artists. Quirky works of art suddenly become valuable simply because someone paid a lot of money for them. 
 
With no earnings to guide prices, valuations can go to the moon. KPCB – with a lot more Snapchats where this one came from – is along for the ride. 
 
But do you, dear investor, want to be taken for a ride too?

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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