Now you see it, now you don’t?

Snapchat may have built an audience, but will the money follow?

As most of you will no doubt know, Snap Inc. (the parent company of Snapchat) made its debut on the New York Stock Exchange last week, closing its first day of trading up 44% at a price of $24.48 per share which valued the company at a staggering market cap of more than $28 Billion.

Despite some subsequent market corrections, this is still an amazing outcome for a company that has consistently been losing money. In 2016, for example Snap made a net loss of $514 million, with revenue growing at a lower rate than the direct cost of achieving that revenue.

Figures at the end of 2016 also showed Snapchat has built an audience of 158 million daily active users, still growing, but at a slower rate than previously, raising questions as to whether its future growth will become far harder to achieve.

Early investors are therefore taking a calculated gamble on Snap Inc’s future potential to turn a profit, based on their initial audience growth to date, but success is by no means guaranteed.

It reminds me of the hysteria surrounding the Dotcom boom (and subsequent bust) of the late 1990s where a gold rush mentality prevailed as people saw the IPOs of the time as an opportunity to get rich quick.

I personally got caught up in the hype, parting with a not inconsiderable sum of money to buy shares in Liberty One, Australia’s first publicly listed internet company.

Boasting a team of high profile directors and ambitious growth plans, this was one not to miss out on, despite the lack of any tangible proof that the fundamentals were solid or that it would ever be able to make a profit.

And of course, it turned out that the company’s plans were built on foundations of sand and I duly lost my investment once the inevitable collapse took place.

Looking back, my decision to invest was naive, based purely on emotional factors - greed and FOMO (an early appearance of that now ubiquitous term!) - I admit I fully deserved to lose my money.

Returning to Snap Inc., I see some parallels with the Dotcom crash.

Snap’s market valuation seems to be based purely on future potential - on the assumption that Snap will be able to monetise the sizeable audience they have built to date.

Maybe they will indeed achieve this and early investors will be sitting on stock that continues to rise, whilst they pat themselves on the back for their shrewdness.

But, then again, building an audience and monetising it are two completely different things.

I read an article recently about the strategy followed by The Times (declaration of interest: I used to work for News UK, publisher of The Times) which takes a diametrically opposite approach to Snap.

Instead of building a large audience and then trying to monetise it, the Times began with getting people to pay for their product and then trying to grow from that much smaller audience base.

The Times’ Chief Marketing Officer Catherine Newman underlines this point, saying that “news shouldn’t be discounted to woo more readers, but rather hiked up to hone in on the valuable ones.”

Neither approach is necessarily right or wrong, but it is interesting to note that The Times has managed to return a profit at a time when the newspaper industry overall is haemorrhaging money.

Nevertheless, the huge success of companies like Google and Facebook continue to attract the attention of venture capitalists, scouring Silicon Valley in search of new technology start-ups that they hope that will become the industry’s next unicorn.

But while these fledgling companies continue to plough through round after round of funding, they shouldn’t bank on that support lasting forever.

There will come a time when the business must stand on its own two feet, supported by a model that can deliver an ongoing profit based on its own performance, rather than continual injection of outside investment.

And whilst it’s great to build a large audience, it’s even better to build an audience attracted by a clear and differentiated value proposition, that will enable you to make money.

Given today’s society is increasingly driven by short-termism, there is a danger that unless a company can soon demonstrate the profitability of its business model, then funds may start to dry up as attention is diverted by the next new shiny thing that comes along, promising the world.

Just ask those who invested in the likes of My Space, Friends Reunited, FourSquare …oh, and Liberty One.