The news first broke last week that Snapchat, the disappearing picture mobile app, had received an offer from Facebook to buy the two-year-old company for $3 billion in cash. ((Evelyn M. Rusli & Douglas MacMillan, Snapchat Spurned $3 Billion Acquisition Offer from Facebook, Wall St. J. Digits Blog (Nov. 13, 2013, 1:43 PM), http://blogs.wsj.com/digits/2013/11/13/snapchat-spurned-3-billion-acquisition-offer-from-facebook/.)) But Snapchat’s 23-year-old co-founder and CEO, Evan Spiegel, turned down the offer that likely would have made him the world’s youngest billionaire. ((Id.)) To most Americans, who are not owners of a company valued in the billions, Spiegel’s decision might seem ridiculous, but it is one not uncommon in the industry.
The exact reasons behind the offer are not known, but one likely explanation is that Facebook faces stiff competition from Snapchat in picture sharing. As employer and public scrutiny of Facebook profiles increases, users are becoming more and more cautious about what they put on the web. ((Jay Yarow, Why Facebook Was Willing to Pay $3 Billion in Cash for Snapchat, Bus. Insider (Nov. 13, 2013, 5:30 PM), http://www.businessinsider.com/why-facebook-was-willing-to-pay-3-billion-for-snapchat-2013-11.)) Snapchat avoids that problem by deleting pictures immediately, which lets users be a little more spontaneous and free, and this is a problem for Facebook. ((Id.))
Nico Sell, whose cellphone app Wickr is a competitor of Snapchat’s, believes that Spiegel made the right decision for multiple reasons. ((Dylan Love, Snapchat Smart Not to Sell to Facebook, Bus. Insider (Nov. 20, 2013, 3:08 PM), http://www.businessinsider.com/snapchat-smart-not-to-sell-to-facebook-2013-11.)) First, she believes Snapchat is worth more than Facebook’s $3 billion offer. ((Dylan Love, Snapchat Smart Not to Sell to Facebook, Bus. Insider (Nov. 20, 2013, 3:08 PM), http://www.businessinsider.com/snapchat-smart-not-to-sell-to-facebook-2013-11.)) But even more importantly, she cited Facebook’s controversial views on privacy and user data, which have often caused concern among users who wanted to keep their personal life private. ((Id.)) Combining Facebook’s approach to privacy with Snapchat’s main appeal might prove disastrous for the latter.
Spiegel himself stated that his decision was not to never sell, but instead to wait until Snapchat had a greater number of users and messages and thus, a higher valuation. ((Evelyn M. Rusli & Douglas MacMillan, Snapchat Spurned $3 Billion Acquisition Offer from Facebook, Wall St. J. Digits Blog (Nov. 13, 2013, 1:43 PM), http://blogs.wsj.com/digits/2013/11/13/snapchat-spurned-3-billion-acquisition-offer-from-facebook/.)) This makes sense given Snapchat’s short history of rising valuations. Snapchat raised $60 million in venture capital funding in June of this year, valuing the company at only $800 million, but in just three month’s time the number of messages sent via Snapchat had nearly doubled, undoubtedly increasing its value accordingly. ((Id.)) Facebook itself had previously offered just $1 billion for the company. ((Id.)) Furthermore, there are already indications that valuations of the company could very shortly overshadow Facebook’s $3 billion offer. Around the same time that news broke of Facebook’s offer, rumors began to swirl that another technology giant, Google, had allegedly offered $4 billion for the mobile app. ((Aaron Souppouris, Google Reportedly Tried to Outbid Facebook for Snapchat with $4 Billion Offer, The Verge (Nov. 15, 2013, 2:41 AM), http://www.theverge.com/2013/11/15/5106950/google-snapchat-4-billion-buyout-rumor.; Joshua Brown, Snapchat’s Value: ‘A Form of Delusion’, Bus. Insider (Nov. 16, 2013, 10:49 AM), http://www.businessinsider.com/snapchats-value-a-form-of-delusion-2013-11.)) Although this is only a rumor and has not been confirmed, Google is not the only potential investor to value Snapchat at $4 billion. The Chinese Internet company Tencent Holdings was attempting to lead a group of investors in a $200 million investment in the company, which would have placed a value on Snapchat right at $4 billion. ((Evelyn M. Rusli & Douglas MacMillan, Snapchat Spurned $3 Billion Acquisition Offer from Facebook, Wall St. J. Digits Blog (Nov. 13, 2013, 1:43 PM), http://blogs.wsj.com/digits/2013/11/13/snapchat-spurned-3-billion-acquisition-offer-from-facebook/.))
Snapchat is not the first technology company to turn down an offer and Spiegel is one of thousands of entrepreneurs faced with a difficult choice. PayPal co-founder Max Levchin, was faced with threats of domination by potential acquirer eBay, and sold only when he grew tired of fighting for independence, but reaped a $1.5 billion payday and has seen his company remain largely intact. ((Claire Cain Miller, Start-Up Leaders Recall Choice to Cash In or Stay Independent, N.Y. Times (Nov. 17, 2013), http://www.nytimes.com/interactive/2013/11/18/technology/startup-leaders-weigh-decision-to-sell.html.)) Philippe Courtot, who founded email provider cc:Mail, turned down a $12 million offer by Microsoft in 1990 before willingly accepting a $55 million cash offer from Lotus Development. ((Id.)) Unlike PayPal’s happy ending, however, the higher cash payout did nothing to heal the wound when Lotus was later acquired by IBM, who shut down cc:Mail. ((Id.)) Courtot would later remark that selling “was [his] biggest regret.” ((Id.)) Maggie Nemser, who founded Blackboard Eats, a site offering restaurant deals, cited dedication to her brand and its customers as reasons for turning down an offer. ((Id.)) These issues likely hit close to home for Snapchat, an application whose main appeal is its private platform, in the face of acquisition by a company that has threatened users’ privacy on multiple occasions.
The decision to stay independent and not accept billion-dollar offers, however, is not without significant risks. Just ask entrepreneurs of the dot-com era in the late 1990s who were “millionaires” one day and essentially penniless the next. Some observers see the recent hoopla of the Twitter IPO as a sign that we are in the midst of another tech bubble, driven by a stock market bubble. ((Jesse Columbo, Twitter’s IPO Is More Proof That Tech Is in a Massive Bubble, Forbes (Nov. 7, 2013, 3:54 PM), http://www.forbes.com/sites/jessecolombo/2013/11/07/twitters-ipo-is-more-proof-that-tech-is-in-a-massive-bubble/.)) When this bubble bursts, it undoubtedly will send shares of companies like Twitter, Facebook, and LinkedIn tumbling, leaving them with less money to acquire smaller startups like Snapchat. ((Id.)) The basis for this belief is that Twitter, despite a $25 billion market capitalization, is not expected to turn a profit until 2015 at the earliest and in fact, has seen losses over the past three years. ((Id.)) Others who do not believe the country is experiencing a tech bubble, nevertheless believe that tech company valuations are “delusion[al]” and over-inflated. ((Id.))
Snapchat, like many other trendy items, may not be around forever and even if it is, it is difficult to see how investors will continue to value the company so highly unless it comes up with a way to make money. Other tech startups have been in a similar position and eventually seen their user bases decline and valuations fall – one time giants like MySpace, GeoCities, LiveJournal, and Napster. ((Jim Edwards, How Snapchat Will Make Money Even Though It Deletes the Most Important Asset It Has – Data, Bus. Insider (Nov. 21, 2013, 8:03 AM), http://www.businessinsider.com/snapchat-data-monetization-through-advertising-2013-11.)) Because Snapchat deletes user data almost immediately, unlike Facebook and Twitter, it is left with little user information to attract advertisers. ((Id.)) While most technology companies attract advertising revenue by disseminating user data like location, gender, and interests, if Snapchat followed suit it would likely destroy its image as a bastion of privacy and eliminate its central appeal. ((Richard Feloni, Why Snapchat Would Face A User Revolt If It Tries to Sell Advertising, Bus. Insider (Nov. 15, 2013, 1:33 PM), http://www.businessinsider.com/ads-would-fundamentally-change-snapchat-2013-11.)) There are a couple of solutions to this problem, in theory. Snapchat could start offering paid upgrades and subscriptions, but that begs the question of how many young users would actually pay for its services. ((Id.)) Another suggestion is linking Snapchat to users’ Facebook profiles and using data from those profiles to select advertising, but this involves creating a relationship with a site like Facebook, which as already discussed, could eventually prove problematic. ((Id.))
For now, the founders, investors, and employees of Snapchat are left only with uncertainty. Their optimism and steady growth could indeed lead to the higher valuation Spiegel hopes for and riches for them all, or the market could change, users could move on to the next “big thing,” and Snapchat and its billion-dollar valuations could disappear just like the images its users send.
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