‘A million dollars isn’t cool. You know what’s cool? A billion dollars.”
That immortal line, uttered in the film The Social Network by Justin Timberlake (playing Napster co-founder Sean Parker) to Jesse Eisenberg, playing Facebook founder Mark Zuckerberg, has become the standard for any startup seeking to make a mark on the world. If you’re not worth a billion dollars, why are you even trying?
But we are now seeing valuations of startup companies – often with no appreciable revenue, let alone profit – that might have even Parker whistling.
Pinterest, which lets people “pin” images they like to web pages and share them in a social network, last week raised another $367m (£245m)in funding, from a number of investors. That implies the business is now worth some $11bn: about £1bn more than Sainsbury’s. Snapchat, maker of a mobile app that provides short-lived photos and videos in a different social network, has raised $200m from China’s Alibaba, valuing it at a reported $15bn – or more than Marks & Spencer, Ladbrokes and the Wetherspoons pub chain added together.
These are some of firms currently attracting the biggest valuations – but can they possibly be worth it?
Valuation $11bn, after seven rounds of formal funding
Business model Users see and create pages of “pinned” images taken from all over the web, which they can share with others; advertisers can also put up their own images and get them in front of users, either through sharing or by direct addition. A “buy” button lets people buy things directly.
Is it worth the money? “Pinterest knows what its users aspire to,” Ben Thompson, an independent analyst writing at Stratechery.com, said as the latest investment was announced last week. “That may be a vacation, a house or a hobby; it can be a significant event like a wedding or a baby. All of these involve big-ticket purchases as well as the potential formation of lifelong brand affiliations.”
That makes it attractive for both brand advertising and direct marketing, he says, especially as 80% of users are women, who can be difficult to reach on other internet sites.
Meghan Burns of upmarket clothing chain Vineyard Vines told Forbes magazine that, with Pinterest, “at least people have shown some intention to be served the content you’re providing them. As a luxury brand, it’s a huge step in the right direction.”
Pinterest knows what people are looking at. What it needs next is to persuade its users to buy on the site, and keep buying.
Business model Snapchat provides self-destructing photos and short videos from people in your social network, and recently started offering links to video stories from news organisations such as Sky, Yahoo News, Cosmopolitan and more.
Its potential revenue streams include putting adverts into the stream of pictures people see; charging news organisations for visibility; and letting people buy “stickers” (online graphics) to send to their contacts, as WeChat and Line do in China and Japan. The most valuable opportunity could be turning its app into a “platform” that other services could use for payment or other services. They would then be integrated into Snapchat, which would then act almost as an “app store” in its own right, skimming off business.
Is it worth the money? Snapchat has more than 100 million monthly active users, and a huge proportion of that total are teenagers, who within a few years will be earning, and (it hopes) still using its service. WeChat (which has 1.1 billion users, with 440 million monthly active users) is expected to achieve revenues of $1.1bn from in-app purchases this year; if Snapchat can grow big enough and get people to use its service in the same way, it could easily make comparable money.
Business model BuzzFeed is often mistaken for a non-serious news organisation (with people pointing to its love of listicles). But rather as print newspapers’ business model is to bring advertisers and readers together, BuzzFeed aims to bring brands and internet browsers together by creating “native advertising” – viral content built with the brand – which then spreads like wildfire online, carrying the brand’s name. It has more than 200 staff, is profitable and generates revenue of more than $100m annually.
Is it worth the money? The Washington Post is valued at about $250m; Tribune Publishing, owner of the LA Times, about $490m. But BuzzFeed, born in the social internet age, doesn’t care about banner adverts or pay-per-click revenues; it wants people to pass on what they find on its site and reach as big an audience as possible.
Marc Andreessen, the co-founder of Netscape, who now runs venture capital company Andreessen Horowitz, recently invested and talks of “a profoundly important new media institution”. It may be the first of the “new newspapers” for the web.
Business model Uber insists it is a “ride-sharing” company, rather than a taxi business, which lets it circumvent many inconvenient, and expensive, regulations governing taxi use in cities around the world.
It takes a slice from the payments between its customers – the passengers – and drivers it pairs them with, who own their own cars. It owns no vehicles and none of the drivers are employees. By undercutting standard taxi companies, and encouraging people who couldn’t otherwise afford to be taxi drivers to get into the trade, it has unlocked a huge market of willing travellers and car owners.
Is it worth the money? Many in Silicon Valley think so, arguing that Uber’s strength lies in its logistics algorithms, which match would-be riders with the location of drivers.
Those algorithms could be used for all sorts of other delivery services, so Uber could potentially expand into product delivery to fixed locations. “They have the highest potential of any of the companies on this list,” says Thompson. “They are making a bid to be the physical connection between everyone and everything.” The sky may be the limit.
Business model Established in 2007, Flipkart sells goods online in India via a network of 4,000 sellers and 13 warehouses, from which it ships to 300 cities. In 2013 it changed its business model to a “marketplace” rather than an “inventory” one, to cut the amount of stock it holds.
Five out of six Indians who go online visit Flipkart, the company claims, and it has 30 million registered users – three times larger than its nearest rival. It is aiming for annual revenues of about $3bn this year.
Is it worth the money? Flipkart is essentially India’s version of Amazon, homegrown and thriving. “It’s all about scale and potential opportunity,” says Neil Shah, an analyst for CounterPoint Research who lives in Delhi. “Flipkart has a huge opportunity to maximise its reach, scale and revenues. It is hiring lots of product and engineering folks and building a “big data” and analytics team to learn more about consumers, purchasing habits and so forth, which will propel it ahead of the competition.”
Though Amazon plans to launch in India, Flipkart has the advantage of knowing its audience, in a country where three-quarters of the 800 million population have yet to go online.
Business model The Shazam mobile app can identify songs, or known sounds (from adverts) and gives users the option to buy the songs directly, or to connect to special offers from brand advertisers.
Is it worth the money? Having started as a way to identify (and buy) songs heard on the radio, Shazam is trying to inveigle itself into the £200bn worldwide TV advertising market by letting advertisers connect to would-be customers – witness the “Shazam now for special offers” messages starting to appear on TV ads.
It’s not yet profitable, but insists that’s only because it’s adding staff. As music moves away from downloads to streaming, and TV advertising is squeezed by Google and Facebook, its future isn’t assured. But it is unique.
Business model Provides an advert-supported or subscriber-paid source of all the streaming music you could ever want to listen to (apart from Taylor Swift and a few other holdouts). Listeners don’t “own” the music; it’s streamed to their desktop or mobile device, so requires a decent internet connection – but no CD drive.
Is it worth the money? Founded in 2006, Spotify has expanded to 53 countries, covering an internet population of more than 1 billion people, but claims just 50m users worldwide, of whom only 12.5m are paying.
Chief executive Daniel Ek is sure people will, eventually, shift to paying the monthly £9.99 subscription. But despite its revenues, Spotify isn’t yet profitable, and about 70% of those revenues go to pay musicians and labels.
Meanwhile, similar streaming rivals for paying customers – including Pandora, Deezer, Apple’s Beats and Google’s YouTube – aren’t going away. “A picture emerges of Spotify squeezed in the middle [between Beats and YouTube] … it would be foolish to underestimate the scale of the challenge it faces,” Mark Mulligan of Midia Consulting wrote on his Music Industry Blog.
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