* The content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

By Gaby Tran, Carina Guo, Sivaanii Arunachalam

Business Overview

Discord, founded in 2015, is a comprehensive communications platform built for communications. The platform allows gamers, and others, to organize themselves into “servers”. Discord’s main revenue streams are their premium subscriptions, fees from game sales and memberships, as well as server boosting. The company now boasts over 150 million active users, spread out amongst various servers, and 300 million registered accounts. The largest portion of Discord’s revenue is derived from the premium subscriptions. Called Nitro, the plan costs $9.99 per month or $99.99 per year. Customers also have the option to purchase an alternate version called Nitro Classic, available for $4.99 per month or $49.99 per year. The Company has experienced fast pace revenue and MAU growth in recent years. Discord generated $130 million revenue in 2020, an 188% increase year-on-year. In 2021, it was valued at $15 billion, doubling its value in under a year.

Below is a graphical representation of Discord’s revenue growth in thousands.

Industry Overview

Discord is uniquely situated at the intersection of gaming, social media, and others like blockchain, education, etc., allowing the company to penetrate numerous high growth industries. For example, the gaming industry has a $198.4B TAM and 8.9% CAGR, while the social networking apps industry has a $39.7B TAM and 23.6% CAGR. Generally, the online presence of industries across the board were spurred by COVID transition to digitization, turning consumers’ attention to versatile platforms like Discord’s. Amid this shift appeared an increased desire for more “novel” models of social interaction (for example, the “authenticity” element in BeReal). Discord, by allowing people to create entire miniature ecosystems in the form of servers with roles, access permissions, and additional customizable features, has captured the interest of millions of users during this time.

Below is a graph of how many thousands of users are in the most popular targeted servers.

Furthermore, Discord’s typical user demographic has a right skewed distribution for age (42% of users are 25-34) and consumers are predominantly (>90%) located in the United States.

Some factors to keep an eye out for include resilience, scalability, and quality, which Discord maintains high standing for yet remain as important as ever. Additionally, while Discord currently does not monetize their user data, increased scrutiny over social media companies such as the TikTok/ByteDance controversy poses further necessary consideration if Discord were to shift its privacy strategy.

Competitive Landscape

Discord is frequently compared to companies in messaging, video call, work communication, and social gaming spaces such as Skype, Zoom, and Microsoft Teams.

However, no company is actually that similar and none can act as a replacement for the wide scope of capabilities that Discord’s platform offers. While competitors tend to focus on video, text, or a specific industry, Discord’s advantage lies in its versatility and ability to latch onto the growing social network of people’s online presences. The most directly similar product to Discord is Slack, which offers a platform of a similar layout to Discord’s—with navigation sidebar, multiple channels per

workspace/server, video and audio call, and a substantial user base. However, Slack’s advantages lay in a professional setting and its stronger features align with this, such as larger file sharing, privately saving posts, folders to organize sidebars. Essentially, Slack wishes to be a “digital HQ” whereas Discord is community-centric and thus is superior in audio/video quality. Discord offers a creative outlet for users

through its public forum, as well as private, server styles compared to Slack’s common use as a walled-off and organization-specific platform. While Slack remains entrenched in a professional lens, Discord’s background in gaming provided a comparatively more “informal” start that is more transferable to wider audiences, ensuring Discord’s continued growth.

Thesis 1: Engaging, User-Friendly Product

Discord has always emphasized its user-first philosophy, and this has resulted in unmatched user engagement. With a DAU/MAU ratio of a little over 50%, compared to Facebook at 60%, and its high long-term retention rate, Discord is well-positioned to monetize their consumer base. With this strong product, Discord has developed a platform that caters to a wider demographic. Its early years were filled with a focus on higher quality technologies for its gamer user base, drawing appeal from integrations with third-party streaming platforms. Then, COVID marked the onset of Discord’s era of adaptability and resilience, when the initial strong foundation of high-quality tech transformed the platform into a hub for community gathering and communication. At the present point in Discord’s timeline, network effects, diversified product offerings, and new monetization streams continue to propel the company’s growth. Discord has a growing and reliable audience—the proportion of people using Discord for non-gaming purposes went from 30% in late 2019 to 80% in late 2021, and the percentage of Americans under 54 using or interested in Discord went from 22% to 33% from COVID peak in January 2021 to August 22.

Thesis 2: Upside Potential from Unbundling Nitro

Nitro is Discord’s tiered recurring subscription model with an additional scalar quantity element in the form of “Boosts” (e.g., server improvements, larger file-sharing, etc.), whose benefits are primarily categorized into utility (e.g., higher streaming quality) and expression (e.g., custom stickers). Discord’s platform caters to a demographic that is used to paying for cosmetics, ranging from buying filters for Instagram to using skins in Fortnite and so on. Each new added feature accelerates the adoption curve, indicating underestimated upside potential as Discord adds additional features.

Critically, Discord didn’t start focusing on revenue generation until mid-2021, before which the company only had 18 employees dedicated to this mission. Now, Discord is expected to reach 500M in revenue in 2022, the majority share of which comes from Nitro. Based on our revenue model, an estimated 3% of MAU users are paying for a subscription, compared to ~1-1.2% for the 3 years prior. This corresponds to paying user growth of 231% from 2020 to 2021. A further increase in conversion rate of free users due to the recently launched Nitro Basic plan (lower price, targets current non-paying users) can be expected. This is what makes entry into non-gaming sectors extra valuable. As a result, Discord does not rely upon monetizing per server, but rather discovers a revenue generation niche in its ability to monetize users. People often participate in multiple activities/have multiple interests that can develop well in a server-based model, so motivating users into a dedicated and loyal customer base has spurred Discord’s growth in the quantity of servers, which has attracted more users, and so on.

Thesis 3: Diversifying Monetization Avenues

Discord is capitalizing on a valuable creator monetization opportunity, where erver owners can offer custom subscription tiers (ranging from $1.99 to $199/month) to give users access to premium content, with Discord taking a 10% cut. There is already an underground economy on Discord that external channels (YouTube, Patreon, Twitch, Shopify) are already monetizing, and Discord now has an opportunity to take it native. However, the relationship is not necessarily competitive; creators can get people to subscribe on both channels for different benefits. The key value-add for Discord is synchronous conversations because while other platforms focus on consumption, Discord’s success is largely attributed to its high-quality engagement.

Risks and Mitigants

Risk: Discord often experiences relatively high user churn.

Discord has increased its focus on improving the onboarding experience, especially in large, public servers, in order to mitigate this risk. For example, features include a home tab to catch up on what you missed or smart notifications to increase ease of use.
Discord counters this with its high long-term retention—once people stay over 6 months, they’re basically part of the consumer base forever. Discord has numerous opportunities for growth by further drawing in existing loyal customers’ attention into a wider scope of servers, therefore using the network effect to bring new users on.

Risk: Discord experienced stalled growth post-COVID.

This is largely a directly post-COVID phenomenon resulting from the surge in in-person activities following years of lockdown. After this surge inevitably tapers off, people will continue to use online platforms for communication. In fact, the end of the pandemic facilitates increased group formation from growing social activity, and Discord has already established itself as the worthy option for this.
COVID-19 laid the foundation for healthy, active communities to thrive on Discord. The pandemic pulled growth forward several years in just one year, allowing them to break into non-gaming sectors.

Risk: Discord may not be able to execute a successful IPO.

This is highly dependent on market conditions, and there has generally been very low IPO activity now with tech being hit extra hard. However, there is likely no shortage of companies willing to acquire Discord. The company’s growth is undeniable and its attractiveness towards companies like Microsoft (which attempted to acquire Discord) is proof of that.
Discord has a strong leadership team with backgrounds in both IPOs and M&A. For example, Discord hired Tomasz Marcinkowski, who had led Pinterest’s successful IPO in 2019, as its first CFO.

Valuation

In their last round of funding in 2021, Discord achieved a post-money valuation of $15 billion. Discord hopes to go public by the end of 2024 with an ambitious revenue target of $1 billion, which implies a 40% annual revenue growth rate from their estimated 2022 revenue of $500 million. Slack was purchased by Salesforce in 2021 for $27.7 billion, which corresponds to a 42x EV/Revenue multiple. Prior to the acquisition, Slack was trading at ~30x EV/Revenue. This gives Discord an implied valuation of $15 to 20 billion.