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One of the first VCs to discover Facebook explains what Snap must do to succeed

Rick Friedman | Corbis News | Getty Images

Chi-Hua Chien helped make one of the greatest bets in venture capital of this century: while an associate at Accel Partners in 2005, he pointed the firm to a little company known as "The Facebook."

As Chien explained it to CNBC, he was sitting in the basement of the Stanford Business School with Seth Sternberg, who told him he was quitting the business school to join a little six-person startup. At the time, the predecessor to Facebook was only available to college students, which gave Chien an edge. "I was one of the few practicing VCs who also had a full-time .edu address I could use."

He went back to the partners at Accel, who studied the company -- several of them piggybacking off Chien's Facebook account -- and five months later Accel and Peter Thiel put $12.5 million in at a valuation of $87.5 million. Yes, million with an "m."

By the time Facebook went public in May 3012, its stake was worth more than $10 billion.

Could history repeat itself with Snap?

Chien teamed up with his business partner Eric Kim at Goodwater Capital, an early stage VC focused on consumer startups founded last year, to analyze how Snap could be worth its IPO valuation of $24 billion. (Chien and Goodwater are not investors in Snap and don't plan to buy into the IPO.)

It's a rich valuation for a company that lost $515 million on $404 million in revenue in 2016, but Chien says that's not how early investors will think about it.

"Look at 2024 to 2027, when the company is generating significant EBITDA and cash flow," he said, pointing to Goodwater's best-case projections of $7.3 billion in EBITDA on $14.8 billion in revenue by 2027.

"What you'd need to believe is that Snap has built a very substantial defensible position as a mobile media company among millennials. That's a generation that doesn't watch linear TV, doesn't listen to the radio, but uses Netflix and Spotify."

He continues, "Advertisers say look, I cannot get these people anywhere else, I need to buy somewhere. I can't let the business die with people over 30. That's a big bet."

Chien believes that Snap can only get to $15 billion a year by grabbing money from current TV advertising budgets, which currently amount to $70 billion a year.

"Facebook, Google, and Twitter all want to tap in," he said. "My guess is that Snapchat has the inside track as a video-first mobile platform. The consumption model is curated Stories presented to the user."

Today, most of the online advertising growth is going to two companies: Google and Facebook.

Google in particular seems like a tough competitor, given how dominant YouTube is on video -- Google said on Tuesday that users are watching more than 1 billion hours of YouTube videos per day, comparing favorably against daily TV consumption in the U.S., which is 1.25 billion hours a day.

But Chien argues that Google and Facebook don't get a lot of the so-called "brand" advertising budget that's still mostly on TV. "Snap is going straight up for that," he said. "Major high-quality broadcast-quality content. Not user-generated content."

Chien is not predicting whether Snap will succeed or not, and he pointed out several big risks: first, the company has had some challenges with turnover in ad sales, and brand advertising is very much a relationship-based business. "They are at the scale now where advertisers can't ignore them, but not where advertisers have to absolutely figure out how to rush for the door."

Second, Snap faces stiff competition from imitators like Facebook's Instagram Stories in the U.S. and Snow in Asia. That, combined with limited interest from the over-30 crowd in the U.S., could make it hard for Snap to keep increasing its user base.

Still, Snap could become a panacea for brand advertisers who are concerned about how to reach the under-30 crowd. "The under 30 demo[graphic]'s consumption of traditional measured media is so limited, the dollars have to go somewhere."