Discord

Deal: Discord

We believe that now is a great opportunity to invest in Discord as the company is well-positioned to capitalize on shifting consumer trends and expand its monetization channels beyond its paid memberships.

The COVID-19 pandemic and the widespread adoption of remote work accelerated the adoption of online communication tools. Tools like Slack and Microsoft Teams experienced rapid growth in recent years as companies sought alternatives to email. Slack’s user base is believed to have risen from 12 million in 2019 to 54 million in 2023, while Microsoft Teams’ user count rose by 15x during these four years to 300 million. While these tools are great for enterprises looking to streamline communication between their employees, they fail to adequately meet the needs of the 3.8 billion users who are part of online communities.

Discord is a communication and Voice over Internet Protocol (VOIP) social platform. Discord enables users to interact with each other via voice calls, video calls, text messaging, media and files. Users can interact with each other through 1 on 1 chats or “servers,” which are communities they can join through invite links.

Discord was founded by Jason Citron and Stan Vishnevskiy, two avid gamers, in May 2015. Prior to starting Discord, Citron previously founded OpenFeint, a social gaming platform for mobile games, which was acquired by GREE in 2011 FOR $104M. Vishnevskiy previously founded Guildwork, another social gaming platform.

Investment History

Discord has raised $995.4M since its inception. The company was most recently valuedat $15B following a $700M funding round in September 2021. Fidelity has since marked down the value of its initial $3.3M Discord investment by 47% as of June 2023.

Investors in Discord include

Stage	Round Size	Valuation	Investors
Seed	$1.1M	N/A	Accel General Catalyst Youweb Ridge Ventures
Series A	$8.2M	N/A	Benchmark
Series B	$20M	N/A	Benchmark Tencent
Series C	$20M	N/A	Greylock Spark Capital
Series D	$50M	$775M	Index Ventures IVP Greylock Spark Capital
Series E	$50M	$1.65B	Tencent Spark Capital Benchmark  IVP Index Ventures
Series F	$150M	$2.05B	Greenoaks FirstMark Index Ventures IVP Spark Capital
Series G	$100M	$3.5B	Index Ventures
Series H	$100M	$7B	Greenoaks Index Ventures
Series HSeries H	$500M	$15B	Dragoneer Investment Group Fidelity Coatue Baillie Gifford Franklin Templeton

Business Model

Discord’s communication features are available to users for free, which has enabled it to become the primary platform for online communities. Discord’s primary source of revenue are Nitro memberships which are priced at $2.99/month and $9.99/month and give subscribers access to additional features including custom emojis, unlimited super emojis and more backgrounds. In October 2023, Discord rolled out an in-app store where users can purchase avatar decorations that’s available to Nitro and non-Nitro subscribers. Discord has developed a reputation as being a developer friendly platform. The company lets developers sell app subscriptions, which include moderation bots and mini-games, directly to users. Developers receive 70% of each transaction while the company keeps the remaining 30%. Each month, over 45 million users use the more than 750,000 third-party apps on Discord’s platform. Creators on Discord can sell ticketed events and member subscriptions through their servers, and the company takes a 10% cut on all transactions. Discord is the exclusive home to popular generative AI startup Midjourney which has 15 million users. Midjourney is generating $200M in ARR, of which a portion goes to Discord.

Traction

Discord’s revenue grew by 44% YoY in 2022 to $445M. While this was down from the 146% growth the company experienced in 2021, Discord was an outlier in a year where most companies saw revenue plateau or fall. Its revenue has risen by a CAGR of 109.57% in the last five years. If we conservatively assume that Discord’s revenue grew by the same amount in 2023, the company would have ended the year with $640M in sales. Discord is home to 19 million active weekly servers, up from 6.7 million in 2020. 4 billion minutes of conversations occur on Discord’s servers daily. In 2020, Discord expanded its focus beyond its original niche of gaming and it is home to popular servers covering a variety of topics including “English” (612,000 members) and “python” (368,000 members).

Discord had 183 million MAUs in 2022, up from 151 million in 2021 and 56 million in 2019. The company’s MAU count has risen by a CAGR 39.19% over the past five years. Discord would have ended 2023 with 221 million MAUs if we conservatively assume it grew by 21% (the same amount as 2022).

The average Discord user is 16 years old and the app is used by 34% of teenage boys and 22% of teenage girls in the U.S. In comparison only 22% of teenage boys and 11% of teenage girls in the U.S., use Twitch. Furthermore, Discord has been able to successfully diversify the geography of its user base as 71% of users are located outside the U.S. in major international markets such as India, Brazil, and the U.K.

Revenue & Users

New Features

Discord has built a culture of innovation and is consistently releasing new features that align with its users desires. In June 2023, Discord announced it would let creators sell digital products such as recipe books and gaming guides. It has also released a slew of safety features as part of its Teen Safety Assist initiative. Discord has started blurring age-sensitive content for teenagers and will prompt them when they receive a DM from an unknown person. Furthermore Discord’s crash rate on Android has been cut in half and it uses four times less data than before. It is also working on rolling out several highly requested features including enhanced search filters and quick access to a server's member list.

WhatsApp is an instant messaging and VOIP platform. While WhatsApp was initially designed to enable users to communicate with friends and family members, it has now become a platform for online communities and a place where businesses interact with their customers. WhatsApp has 2 billion MAUs and was acquired by Meta for $19B in 2014. Prior to the acquisition, WhatsApp raised $60.3M from notable investors such as Sequoia Capital

Steam Chat was launched by video game developer Valve in 2018. While the product is competitive with Discord, it operates exclusively within the Steam gaming platform.

Slack is an online communication platform with an estimated 54 million users (more details below).

Twitch is a live streaming platform that has rolled out in-platform communication features designed to enable interactions between streamers and their fans. Twitch has an estimated 240 million MAUs and was acquired by Amazon for $970M in 2014. Twitch raised $35M from investors such as Y Combinator, Bessemer Venture Partners and Thrive Capital, before it was acquired.

Telegram is an encrypted messaging platform that offers similar functionalities to Discord and Whatsapp including groups chats and voice messaging. Telegram has raised $2.9B since its inception in 2013 from investors such as Mubadala and ARK Fund. It is estimated to have 800 million MAUs.

IPO Prospects

Forbes included Discord in its list of “5 Best Upcoming IPOs To Watch in 2024.” Forbes noted that Discord has become the go-to platform for online communities in a variety of niches including its initial beachhead of gaming. Furthermore, while Discord operates in a competitive market, the company has proven its ability to acquire and retain users by constantly releasing new features and prioritizing data privacy. While the company hasn’t filed paperwork to go public, it’s getting increasingly close to a liquidity event and has been the target of acquisition offers in the past including from Microsoft who offered to buy the company for $12B in 2021.

Public Market Comparables

Slack raised $1.4B from multiple high profile investors including Andreessen Horowitz, Kleiner Perkins, Initialized Capital, and Accel. Slack was valued at $19.5B when it went public via a direct listing in June 2019. In December 2020, Slack was acquired by Salesforce for $27.7B, which represented a 54% premium to its valuation and 27x multiple on its ARR.

Discord is one of the most under monetized platforms relative to other publicly traded social media platforms. In 2023, Discord generated $2.90 in revenue per user compared to $43.94 for Meta, $6.14 for Pinterest and $2.90 for Snap.

Experienced Founding Team:

Jason and Stan are experienced operators with a proven track record. In 9 years, Jason and Stan have turned Discord into a $15B dollar company that generates over $400M in annual revenue and has more than 180 million MAUs globally. As two lifelong gamers, Jason and Stan have a deep understanding of what their users expect and have built their company culture around continuous innovation and adapting to consumer demands.

Continuous Growth and New Monetization Streams

While Discord benefited greatly from COVID-19 lockdowns, the company has been able to continue its growth during the post-pandemic era. Discord’s revenue grew by 44% in 2022, at a time when many other companies saw their revenue decline or plateau. Furthermore, its MAU figure increased by 21% YoY in 2022 despite an end to COVID-19 restrictions. While the company has continuously grown its revenue from its inception, its relatively low revenue per user figure is a sign that it has barely scratched the surface of its potential. As Discord continues to grow its user base and release new features, the company will be able to boost its revenue through its existing monetization channels while rolling out new methods to diversify its sales. For example the global generative AI market is expected to grow from $11.3B in 2023 to $51.8B in 2028, and Discord is well positioned to benefit from the continuous rise in popularity of tools such as Midjourney.

Strong Investor Base:

In the nine years since its inception Discord has raised nearly from a plethora of high quality investors such as Accel, Coatue, General Catalyst and Benchmark. Discord’s investor base has previously backed multiple tech unicorns including:

Rapidly Increasing TAM

As Discord continues to attract communities serving different niches, the company’s TAM is only going to get bigger. Furthermore by building a geographically diverse user base, Discord has shielded itself from being overly dependent on one market ensuring it would be able to financially sustain itself should there be an unexpected issue in a major market.

Risks facing Discord:

Discord, like any other online platform of its size, is vulnerable to bad actors who engage in malicious activity on its platform. In recent years, stories have emerged of adults sending inappropriate messages to minors and in its early days, Discord was viewed as a platform for hateful groups including White Supremacists. As of January 2024, Discord’s Trust and Safety team accounts for 15% of its workforce. Furthermore, every quarter, the company publishes a transparency report, the efforts it has taken to crack down on malicious activity. While Discord has continuously rolled out new safety features, it will have to evolve its content moderation capabilities in order to adequately react to any new threats posed to users on its platform. Failure to act, could result in a high user churn rate.

Pending Legislation

Multiple studies have shown that social media use has led to increased feelings of anxiety and depression amongst teenagers.In recent years, lawmakers in Congress have taken an increased interest in protecting minors from the harmful effects of social media. This has led to the introduction of the bipartisan Kids Online Safety Act (KOSA) in Congress, which would mandate companies like Discord take action to ensure minors aren’t shown content that could be harmful to their mental health. Over 200 different organizations have urged Congress to pass KOSA and it has been endorsed by President Biden. If KOSA becomes law, Discord could face multiple lawsuits if it fails to implement adequate safety measures.

Lack of Profitability

While Discord has continuously grown its revenue, the company has yet to become profitable. Market conditions have shifted since Discord’s last funding round in 2021 and with interest rates at their highest levels since 2008, late-stage companies are under increasing pressure to become profitable if they want to go public or raise another round of private capital.

Low monetization rate

As discussed above, Discord has one of the lowest per-user monetization rates among companies in its sector. A failure to rectify this situation could result in Discord failing to maximize its revenue potential.

Total Allocation: $1m

Price per share: 150$

Min ticket: $10 000

Seller: Early Employee (no ROFR)

fff.club fees: 7% fee + 7% carried interest