UPDATE: Snapchat has reportedly filed for an IPO that put its valuation in the range of $25 billion.

Editor's Note: Inc. Magazine announced its pick for Company of the Year on Tuesday, November 29. It's Riot Games! Here, we spotlight Snapchat, one of the contenders for the title in 2016.

Five years ago, if you had told Evan Spiegel and Bobby Murphy that they'd be running a company valued at $20 billion today, they wouldn't think you were crazy. They might even say, "well, duh."

You see, Spiegel and Murphy were just college students in 2011 when they came up with the idea for Snap, the company formerly known as Snapchat. At the time, the two fraternity brothers at Stanford University developed a disappearing messages app--which they dubbed "Picaboo"--for a class project. The response from the class was tepid at best, but Spiegel and Murphy were undeterred.

Today, the Venice, California-based company has evolved--rapidly--into a hub for news, entertainment, and social networking. Not only have the likes of Barack Obama and DJ Khaled joined the chorus of 150 million daily active Snapchat users around the world, the company is also poised to go public early next year. It's reportedly seeking to raise as much as $4 billion in the IPO, which could value Snap at as much as $35 billion.

A Banner Year

This year, Snapchat surpassed rivals Twitter and Pinterest to become the fastest-growing social media company in the U.S., with users sending 9,000 Snaps per second, according to its own data. The company claims that users watch more than 10 billion videos on the app each day. (For reference, Facebook, the reigning social media champ, reported in November 2015 that users watch around eight billion videos on the network each day. Though, that figure is likely higher now.)

Also, this year, the company started to capitalize on its Discover feature, which kicked off in 2015. It scored a series of deals with major publishers, including NBC and The Wall Street Journal, as well as with sports leagues like the NFL. These companies publish content on their own Snapchat channels, typically short video segments that disappear after 24 hours.

Snapchat saw its top line grow, exponentially. Digital-marketing researcher eMarketer estimates that U.S. advertisers will spend a whopping $384.4 million on Snapchat advertising by the end of 2016, and as much as $804.5 million in 2017. That's more than six times Snapchat's original target of $50 million last year, according to tech news site Recode.

A majority of the company's sales come through video advertisements on user-generated "Stories" and Discover content, though the company also makes money through sponsored lenses and filters. And starting this fall, Snap plans to start peddling its first-ever hardware product--a pair of camera glasses called Spectacles that it intends to sell for $130 apiece. Snap unveiled the new device in September.

Fast Forward

And while the company is well-known for its appeal to Millennials--a desirable market for advertisers--there's still room to grow. On any given day, Snapchat reaches 41 percent of all 18- to 34-year-olds in the U.S., according to 2015 Nielsen data.

Building out partnerships with dozens of publishers on the Discover platform has been key to expanding Snapchat's audience. It recently redesigned the feature, so publisher and user-generated stories are now presented together. It's also moving away from its current revenue sharing model, offering to pay media partners up front instead. The change could dissuade some publishers from coming on board, inasmuch as they would have less control over how their content is sold.

Even so, the number of Snapchat users in the U.S. is estimated to increase by nearly 14 percent in 2017, according to eMarketer data.

The challenge moving forward will be continuing to attract mobile users amid strong competition for Millennial eyeballs. And while Snapchat may be the fastest-growing social media company, its audience is small potatoes compared with Facebook's 1.7 billion daily active users and Instagram's roughly 500 million. Instagram recently unveiled its own "Stories" feature, which has the potential to steal users from Snapchat.

Analysts point out that the challenge for social media companies, including Facebook and Snapchat, will be continuing to get individual users to generate content at the same rate that advertisers want to sell. "For Snapchat, that's even more critical, because people are spending a significant amount of time on the platform," says Cathy Boyle, a senior principal analyst with eMarketer.

"It's very tough in the mobile space to keep someone interested, because there are so many other options out there," she adds.

Snapchat declined to comment for this article when contacted by Inc.

Still, as the company has continued to roll out new and innovative technology since inception--from live Stories to topical filters and (now) smart glasses--the odds are high that it can sustain its growth over time.

As CEO Evan Spiegel last year told graduates of USC's business school, concerning innovation: "Conforming happens so naturally that we can forget how powerful it is. But the thing that makes us human are those times we listen to the whispers of our soul and allow ourselves to be pulled in another direction."

Get Comfortable With the Snapchat Mindset
Published on: Nov 1, 2016