Snapchat and the Rise of Fake Value

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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 warnedits 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 TwitterFacebook, 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.”

Creating value is used to explain the purpose of various business strategies. It is given as the purpose of broad and often hazy plans to digitize services and offerings, and a metric for connecting devices or doing somethingoranother in the cloud. It’s the rationale given for investments in innovation hubs and startup contests.

The term appears on corporate websites and in annual reports. It’s the punchline of slide presentations, and an explanation given to equity analysts for investments and employee hires.

It’s the deliverable for all that technology big companies have been told they need to buy or use.

And, like the fake value of startups, it’s not real until a market prices it. But no big public company can escape the inevitabilities of experience and accounting.

There’s no a priori Greek chorus inflating its potential worth, an intoxicated investor audience willing to pay extra for its promises, or a market interested in viewing its dreams separately from the nagging, messy intrusions of, oh, customers, revenue, and profits. Claiming otherwise risks having pronouncements about value creation discounted, if not ignored outright.

Perhaps the one thing worse than failing to create tangible, balance sheet-worthy value is failing to acknowledge such results as the only differentiator between “fake” and “real.”

Most media know this, since it’s awfully hard for big companies to get the kind of recognition bestowed on tech startups. Equity markets get it too, as big company valuations can be penalized by disruptive fantasies coming from startups…and it’s debatable whether those impacts are ever fully “righted,” or if there’s any value realized prior to the delivery of actual results.

There’s no way the world’s largest public companies are getting “paid” for all the money and time they’re throwing into technology and innovation, though maybe they would if they talked about something other than creating value?

Maybe the opportunity is for established companies to embrace their inner bigness, and talk about customers, revenue, margin, cashflow and CAPEX, and the other real metrics of business value creation (all the things that no purveyor of fake value can claim).

It’s key to communicate the purpose and real-world impact for these activities, but to do so as proof of relevance and truth, as opposed to some dreamy claim of unsubstantiated future benefits that you hope will separate believing stakeholders from their money.

Perhaps established companies don’t need to rely on fake value because they create value for real?