Snapchat has no revenue, and no clear sure-fire way to make money.

And yet, Snapchat is in talks to raise money at a $3.6 billion valuation. 

For people that don't get Snapchat, venture capitalist Bill Gurley tweeted, "If you still don't understand Snapchat, take a look at this tweet from our government's FCC: 

The lesson of this tweet is that people shouldn't be leaving a trail of their actions online. A tweet could be taken out of context, or it could be sent at the wrong time. Similarly, on Facebook some people post party pictures. Or, their friends post party pictures, which can have unintended consequences.

The reason Snapchat is big, and will continue to grow, therefore, is that it doesn't have the messy consequences of Twitter or Facebook for users.

Today the Wall Street Journal reported that Snapchat turned down a $3 billion or more all cash acquisition offer from Facebook.

Here are the revenue targets Snapchat must make to justify that valuation:

• Snapchat value: $3 billion. Twitter’s value-to-revenue ratio: 59.5. Implied Snapchat revenue deficit at this valuation: $50.4 million (TTM, but we can just call it 12 months to be relaxed)
• Snapchat value: $3.5 billion. Twitter’s value-to-revenue ratio: 59.5. Implied Snapchat revenue deficit at this valuation: $58.8 million (repeat the above caveat)
• Snapchat value: $4 billion. Twitter’s value-to-revenue ratio: 59.5. Implied Snapchat revenue deficit at this valuation: $67.2 million (repeat the above caveat)
• And, for fun, Snapchat at $6 billion, or twice the valuation that Facebook reportedly offered, which makes for a fun 2X multiple, for the purposes of calculating potential return and the like: Snapchat value: $6 billion. Twitter’s value-to-revenue ratio: 59.5. Implied Snapchat revenue deficit at this valuation: $100.8 million (repeat the above caveat)

Source:

http://techcrunch.com/2013/11/13/what-are-the-revenue-targets-snapchat-must-meet-to-be-worth-3-billion/

More on why Snapchat is important:

http://pandawhale.com/post/31706/chloe-drimal-early-snapchat-employee-describes-why-snapchat-is-important

More on why Benchmark us pushing Snapchat not to sell:

http://pandawhale.com/post/31708/kevin-systrom-blew-it-selling-instagram-for-1-billion

Jay Yarow on why Zuck was willing to pay $3 billion for Snapchat:

Zuckerberg isn't one of them. There are three clear reasons Facebook wants to buy Snapchat.

1. Sharing photos is the core use for Facebook. Snapchat is fast becoming one of the biggest photo sharing applications on smartphones. That's not good for Facebook, so it wants to buy the company. 
2. Snapchat is developing a unique "social graph". Facebook's whole thing is about understanding the social graph, or how we interact with our friends. It's missing out on a new, key set of social data as Snapchat grows.
3. "Facebook-nevers" are going to Snapchat. Last quarter Facebook warned that teenagers are getting bored with Facebook. Part of the problem: Teens look at Facebook how adults look at LinkedIn. It's not super cool, and it's not a place to let it all hang out. Where are these people going? To Snapchat.

If that's not clear enough, venture capitalist Bill Gurley explained why Snapchat is a big deal in a recent tweet. He linked to a tweet from the FCC that said, "30% of college admissions officers look at applicants online... They loved your GPA, then they saw your tweets..."

The implication is that Snapchat provides a safe haven for people. Today, the wrong tweet, or a bad photo on Facebook can not only embarrass you, but cause you to lose a job. Snapchat with its self destructing messages avoids that problem. 

Zuckerberg tried building a version of Snapchat, and it was a flop, which shouldn't have surprised him considering Zuckerberg once said, "We just believe that an independent entrepreneur will always beat a division of a big company."

But what about the revenue problem? Just about any company that hits the scale Snapchat is hitting can generate revenue eventually. One of the company's investors told us that any big web company eventually figures it out.

People snarked that Twitter and Facebook would never make money, and now they have a combined market cap of $142 billion on combined revenues of $8.2 billion. Of that, Facebook is a $120 billion, with $7.6 billion in annual revenue. Spending $3 billion to defend the company makes sense.