Snapchat and the Rise of Fake Value

The stock of Snap Inc, parent company of smartphone chat app Snapchat, traded down almost 2% yesterday. It briefly popped 44% after its debut on March 2, but has generally trended lower ever since.

Nothing obvious happened in the days prior that would account for the latest drop. Facebook announced the expansion of some copycat service, Vice Media said it had expanded its plans to create exclusive shows for Snapchat, and a big ad agency warned its clients that ads on the platform could appear before or after porn.

Snap Inc didn’t announce any big profit-related news because it doesn’t make any money, and continued to be mum on obvious or reliable plans to do so in the future (it collected half its 2016 revenues from one section of its platform, perhaps supporting its self-described function as “a camera company”).

Yet, even with the latest stock price decline, the market has “valued” it at $20 billion or so.

Forget fake news. Never has the concept of fake value been worth so much.

Fake value isn’t a new phenomenon, of course, as people have seen value where there was none going back past the days of the Dot-com bubble to Enron, then to Black Tuesday in 1929 (with a quick stop to grossly overvalue mortgages in 2007) and, before that, the South Sea and tulips.

What’s different now is that there’s a more robust and effective echo chamber that encourages and rewards those mistakes.

Venture capitalists have been promoting fake value in technology companies at least since Clay Christensen gave them the cover story of “disruptive innovation” in the mid-1990s: Opaque startups get lots of cash and get media coverage of how they’ll magically rewrite the rules of economics, human behavior, and physics.

This fake value is then monetized via IPOs in equity markets, as disruptive fantasies are transferred to uninitiated investors in exchange for real cash: Snap Inc.’s price popped on the first day of trading, which means the insiders who got the stock at the offering price of $17/share were able to make a 50% profit in a matter of hours.

It’s a great racket when it works (the vast majority of startups never get that far), and Snap Inc.’s slow decline could be evidence that the market will eventually discover what it’s really worth. You could say the same is happening to Twitter, Facebook, et al, though the process is far from perfect (or inevitable).

But fake value isn’t the sole purview of capitalist investors; it has been institutionalized into the pursuits and processes of the world’s largest public companies via the term “create value.”

Read the entire essay at Linkedin