More Than Fun and Games
Discord, the instant messaging and VoIP social platform, is rumored - again - to be exploring an IPO. To do that successfully, it needs to grow beyond its gaming focus - and become a superapp.
Dear Readers,
A news alert came through just two days ago that caused much bigger splashes the first time word got out 4 years ago. Discord, the instant messaging and social platform catering predominantly to gamers, is reportedly mulling over an IPO. Back in 2021, the company seemed to oscillate between going public, being acquired by Microsoft, or raising an additional round of funding in the private markets and staying independent. It ultimately opted for the latter. This might be why not too many people are paying attention to the most recent rumours.
It’s almost like the industry and investors are waiting for Discord to come to the same conclusion as last time.
The 80s are the gift that keeps on giving. You’re welcome.
Now, let’s explore where Discord is at, what its IPO could look like, and what I believe it would ultimately have to do to offer a strong equity story and demonstrate the growth and scale that can be the ingredients of a successful public offering.
Discord today
Discord is approaching its 10-year anniversary. First released on May 13, 2015, the platform, which offers communication through voice calls, video calls, text messaging, and media, with communication being private or taking place in virtual communities called ‘servers’, now boasts roughly 200 million monthly active users. Per reports, the company hit $600M in annually recurring revenue by the end of 2023, which represented 35% year-over-year growth at the time, and was valued at $15.2B - which is a very juicy 25x multiple on revenue. Even if valuations have seen a correction since then, it is reasonable to assume that Discord continued to see revenue growth in 2024, which should keep their overall valuation fairly stable.
A good company to compare this financial profile against is Reddit. In its IPO filing, Reddit said it had an average of 73.1 million daily active users and reported revenue growth of $804 million, up from $666.7 million a year earlier. It was valued at roughly $8.9B, so an 11x multiple. Now, Reddit is valued at $22B with revenues of $1.3B at the end of 2024 - a 17x multiple.
It paints a good picture of the potential upside of Discord, but also of the potential downside and going to a valuation that is more in line with where Reddit sat and sits.
The big benefit of Discord’s model and revenue it incurs from it is that it is based on subscription fees, which investors tend to assign a premium to over the more volatile ad-monetization driven businesses like Reddit. And Discord has been able to prove that model to be durable across a few different industries and trends, predominantly gaming and crypto.
Compared to other messaging apps and competitors like Telegram or Signal, Discord really sets itself apart on the scale of its revenue compared to the size of its user base. For example, Telegram has launched premium subscription services, Telegram Premium, and wants to take a page out of Discord’s playbook. While Telegram has over 950M monthly active users, it has about 12 million paid users. At an avg. monthly price of $5, you get to about $720M in annual revenue - plus any revenue from in-app purchases. So on average, $1 per monthly active users. Discord achieves at least $3 per users, with the current numbers likely even higher.
Future growth unlock
But the integration of the AI art generator Midjourney natively into Discord perhaps offers the biggest hint to where Discord’s path may lead.
Users simply send a direct message to the Midjourney Discord bot using the command “/imagine”. Midjourney creates images instantly based on the prompt a user gives it. Payments are handled via subscribing to the Discord server. Everything happens within Discord. No need to leave and jump over into the Midjourney experience.
It’s an indication of what people like Musk have been wanting to turn his social network X into - a superapp.
And that is arguably Discord’s unlock to rapid growth and scale - leveraging its messaging and social platform and turning it into a de facto storefront for other services, offering direct access to a highly engaged audience that uses and hence monetizes the integrated services frictionlessly.
It’s not hard to see how you can add a recommendation model and potentially even an advertising model to this. To top it all off, Discord could easily include social proof for any service or product it's offering. “20 of your closest friends are currently playing this game.” Social selling is powerful and per the audience insights we have at Solsten into 3.4 billion consumers, recommendations from friends is one of the top 3 ways consumers learn about new products. And it’s something the big app stores from Apple and Google can’t do.
Simply put: what if the Apple App Store was natively integrated into a social platform, and you could use any service, play any game, read any story instantly without having to leave Discord? That’s it. This conclusion is so important, you might want to read that again and really let it sink in.
But it’s only step 1.
Discord’s tagline is “Group Chat That’s All Fun & Games”. To unlock dominant scale, it needs to move beyond the gaming and crypto focus and become a platform for the mass consumer - that’s step 2. At 200M monthly active users, Discord has access to roughly 6% of the entire consumer population that actively play video games across all platforms. That’s where the mass consumer is, specifically on mobile.
As one gaming executive said to me on a call this week: “They need special interests groups around cooking. But in order to get there, you have to become appealing to the mass market. That starts with getting rid of the gaming controller in your logo.”
If Discord pursues that, Microsoft will forever be punching the air that they weren’t able to acquire the company back in 2021 for $10B - what would have been the steal of the decade (at least).
Next week I’ll be at GDC in San Francisco. It’s the most important conference for the gaming industry in the Western hemisphere. There’ll be lots to talk about, including the confirmed acquisition of Niantic’s gaming business by Scopely for $3.5B.