That Snapchat has reportedly turned down a $3 billion all-cash offer from Facebook means the rapidly growing free service must have a plan in mind to make money. Logically, it should run ads. Yet Snapchat pursuing an ad-supported model could be one of the worst business decisions any billion-dollar company has ever made.
There are two problems Snapchat has with advertisers. One is a perception gap. The other is a values gap. The former can be remedied; the latter can't if Snapchat stays remotely true to itself.
First, consider the perception gap. A lot of advertisers and journalists perceive Snapchat as a place where teens engage in a more graphic form of sexting. When you hear that, that's basically a coded way of saying, "I don't understand this, so I'm going to think the worst about it." Saying Snapchat is for sexting is like saying Google is for searching for porn. Yes, people use the technology for that purpose all the time, but it's a pretty small part of what's going on. As more stories and studies come out about how and why people use it, the more salacious associations will fade.
The far bigger concern is the values gap. People using Snapchat have entirely different values from how most marketers would want to use it. The crux of this is that Snapchat users value privacy, while marketers value publicity.