Only a handful of people attain folklore status when it comes to spotting the next big thing in Silicon Valley, but Jeremy Liew may soon be one of them.
The self-described “math geek” from Perth, who represented Australia at the 1988 International Math Olympiad, obviously spent a lot of time with big numbers growing up. But those numbers must pale into comparison with the return he has delivered by betting $US500,000 on Snapchat, the social media phenomenon that has recently been valued at $US10 billion ($11.43bn).
If you are very young you probably have no idea what Snapchat is. Which is a good thing — for Snapchat — because its entire audience its made up of (largely female) older teens and early 20 year-olds, who are pure gold in marketing terms.
What you do need to know is Snapchat is an instant messaging service that deliberately erases any text, photo or video just seconds after it is viewed.
The company keeps its actual user numbers a closely guarded secret but in May, Snapchat revealed its users were sending 700 million photos or videos a day.
Facebook tried to buy Snapchat last year for $US3bn. At the time, everyone thought the company’s 23 year-old founder and CEO, Evan Spiegel, was crazy for rejecting the all-cash bid. With a new round of financing in the offing that is believed to value Snapchat at $US10bn, it seems Spiegel understands something fundamental about this generation of young users who have grown up with social media, particularly the behemoth that is Facebook.
When Liew first tracked him down to his campus at Stanford in 2012, Spiegel’s theory about Facebook was radical.
“His vision was mind-blowing at the time,” Liew says. “Evan says, ‘We’re all performing on Facebook. We’re showing the highlight reels of our lives. You can’t actually build a friendship with somebody if you only ever see the best 30 degrees of their lives; you need to see them when they are not just happy or proud but angry, depressed or silly. The risk with Facebook is that when you put that stuff up there it can get used against you — say when you are looking for a job. What we need is a way for people to be their real selves in the moment, as they’re feeling it and if it (a picture, video or text) disappears it frees people to be themselves all the time.’ I thought wow! That makes a lot of sense.”
Spiegel’s idea may have been radical but it clearly resonated. The usage was off the charts.
“I opened up the analytics and saw this amazing engagement. People were using it many times a week and I’ve seen enough companies to know that even off a low base, those numbers were extraordinary,” Liew says. “Spiegel said the company was growing faster than anticipated and they couldn’t afford to pay the server bills any more and I says, ‘Maybe I can help you with that’.”
A few weeks later Liew’s firm, Lightspeed Ventures, closed the half-million dollar seed round. Liew won’t say how much equity it got for that investment but it is common in Silicon Valley for a start-up to give as much as 25 to 35 per cent equity for a seed stake. If that is the case here, depending on the amount of dilution in later financing rounds, it would put the returns in the billions.
This is all on paper, of course, and the real challenges for Snapchat lie ahead. The company has announced it will allow advertising on the platform, something which may turn off its avid user base. Unlike Facebook, a platform where native advertising sits comfortably in a scrolling news feed, the majority of Snapchat’s users engage in person-to-person conversation.
Snapchat’s founders say it would be “totally rude” to insert ads into messages so brands will have to buy space on a less visited “stories” homepage.
That doesn’t bother Liew, who says that once a platform gets into the top 20 most visited sites, they no longer have to accept the meagre rates that come with commoditised internet advertising and even more meagre returns of mobile advertising. “You start to dictate what the ad is and where it is placed,” he says. “If you are no longer serving those standard ad units, you can earn a lot more.”
Snapchat's $US10 billion valuation will ride on that ad product delivering, and handsomely, so is Liew worried about the enormous numbers being attached to Snapchat and other platforms with unproven revenue streams?
"Valuations are where willing buyer meets willing seller," he says. "Today, there's a lot more supply [with] private equity getting in and the public market investing in the late stage. Venture capital investors are looking for multiples of their money. If a public investor sees 30 per cent return he’s happy with that. Expectation of those returns means more supply of capital, and prices are going to go up."
Wall Street's renewed interest in the hottest new startups is great for the Valley's seed investors if it drives up valuations, and with them, bonuses. But the relationship may not stay cosy for long. Silicon Valley wants to not only bite that hand that feeds it, but take whole arm. The hottest game in town, says Mr Liew, is the digital currency Bitcoins. Via Lightspeed, he is investing in digital wallet technology (a way to securely store Bitcoins), and aims to get pole position in a technology that will be massively disruptive to the multi-trillion dollar financial services sector.
"Wherever there is the potential for large value destruction there is potential for large value creation," he says. I ask him if he meant to say destruction. "Ask the media industry how things are going post internet 15-20 years down the line," he replies. "Not awesome. People say Bitcoin is to money as internet is to media."
There are a lot of mathematicians in Silicon Valley attracted to that problem.