Snapchat vs Facebook: Can the underdog get big enough, fast enough?

Facebook casts a long shadow.

Now worth more than $340 billion, the social network lords over the biggest platform in the history of mankind. The company has either bought up its direct competitors or relegated them to also-rans. Few companies outside of Google, Amazon or Apple can consider themselves serious rivals to Facebook.

Snapchat wants to be in that discussion.

The little app that could is now preparing what will be one of the largest U.S. tech IPOs ever, and the biggest since, well, Facebook. Snapchat's reportedly going to be valued somewhere between $20 billion and $25 billion.

Facebook and Snapchat have always had something of a big brother-little brother dynamic. Both companies have dorm-room roots, grew rapidly among a core young audience, and rapidly iterated their products. Facebook had a seven-year head start, however, and has already gone through most of its growing pains.

Snapchat, meanwhile, is just about to hit puberty—and they're hoping for a serious growth spurt.

The rivalry

Like any good rivalry, the one between Facebook and Snapchat has just as good an origin story.

It began in late 2012 when Facebook cofounder/CEO Mark Zuckerberg sent an email to Snapchat cofounder/CEO Evan Spiegel, inviting him up to Facebook's headquarters outside San Francisco.

Zuckerberg ended up coming down to Snapchat's Los Angeles home, where he reportedly offered to buy the company for $3 billion—and told Spiegel that Facebook had readied a Snapchat clone. Snapchat had around six employees at the time.

Spiegel passed. Since then, Snapchat's continued to grow, and Facebook has repeatedly tried to recreate Snapchat's magic. Its original Snapchat clone, Poke, flopped. Most recently, Facebook's been rolling out features in (the Facebook-owned) Instagram, which are nearly identical to those in Snapchat.

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The sincerest form of flattery

Facebook has spent plenty of time and effort trying to copy Snapchat's product. Now, Snapchat will be trying to copy Facebook's financial success.

Much like Facebook when it went public, Snapchat has an impressive product, but doesn't entirely have its business figured out.

"Because Facebook came out half baked, investors are kind of OK with that," said Gene Munster, managing director for investment bank Piper Jaffray. "They saw what happened with Facebook, and you can kind of see that those things do work out over time with smart management teams."

The notion of a company being worth $25 billion, yet not having its financials quite figured out, inevitably leads to skepticism on the valuations of these companies. Like a lot of tech companies, there are big upsides quickly followed by even bigger "if" propositions.

"It's still probably underdeveloped from a 'what it could be' standpoint, but it is nice to see a company taking a challenging view on what could be experienced," said Greg Portell, a partner in consulting firm A.T. Kearney's consumer, media and technology practices."[Snapchat] gets that valuation because of this aspirational view of their ad potential, which is great... if they continue to innovate the ad unit."

Similar, but different

If Snapchat's to some day overtake Facebook, it's not going to be by playing Facebook's game.

Facebook and Google dominate digital advertising. They aren't just big—they also account for just about all the industry's growth. Facebook grew up on simple direct response ads, which still make up most of its income. More recently, it has been making inroads on the brand advertising that usually ends up going to TV ads thanks to its emphasis on video.

Those brand dollars are what Snapchat is also gunning for. The company is reportedly on track to bring in around $350 million of revenue in 2016, almost entirely through advertising. Its 2017 goal is $1 billion, though profitability will likely still be a ways off for them.

It's a difficult proposition, but one that investors may be willing to bet on—especially if Snapchat's user growth continues.

"This is the kind of place where investors like to buy things, where you know that the user metrics are moving in the right direction, and there's this kind of open-ended opportunity of ways they can make money," Munster said.

User growth will buy Snapchat time as a public company, but there's still plenty of work to do. Snapchat is already working to offer things that Facebook isn't, like premium media brands on its Discover platform. Then there's the new Spectacles glasses that appear to be a first step into a possible hardware business that also encourages the kind of personal sharing that Facebook has been trying to recapture.

That's the kind of innovation that Snapchat will need to bring to its ads if it's gonna take on the likes of Facebook. Otherwise, it'll just be another big company, but one still living under the even larger shadow Zuckerberg and Co. have already cast around the world.

"Nobody's getting a premium in the market for very long on those metrics," Portell said. "So the real advantage to Snap and to Facebook and others is: How do you innovate outside of those particular metrics?"