WHAT WE THINK

What We Think

THE SNAPCHAT SITUATION

by RACHEL PASQUA on November 19, 2013 · 1:25 pm

Snapchat founder Evan Spiegel Snapchat founder Evan Spiegel | AP Photo/Jae C. Hong

Are Snapchat’s Founders Crazy for turning down Facebook and Google?

Snapchat has been on our radar for a while now here at Token. A key element of our product development strategy is watching the teenagers in our lives (nieces, nephews, babysitters, etc.) and how they use media, mobile and otherwise. One thing we noticed early on was their disdain for Facebook (quote “its full of old people”) in favor of basic SMS and text messaging based apps, so we weren’t exactly surprised to hear about Facebook’s exhorbitant offer. Nor were we surprised to hear that founder Evan Spiegel turned it down.

The financial reasons for Snapchat rejecting Facebook and Google’s Offers

They can (probably) do better. We have to admit that if Mark Zuckerberg offered us $3 billion dollars (or better yet, Google offered us $4 billion), we’d probably take the money and run but we understand why Spiegel and co-founder Bobby Murphy rejected the offer and it wasn’t (entirely) hubris. There’s a clear monetary reason—the minute Facebook’s 3 billon dollar offer was public knowledge, it automatically validated the worth of the company, regardless of the fact that it has yet to see any revenue. Facebook’s clear interest and faith in Snapchat’s value makes it very possible that Spiegel & Murphy could sell private equity in the company and make at least as much while maintaining ownership. And if you think that seems unrealistic, remember that decisions like this are not made based on the whim of a 23-year-old boy-wonder founders. While Spiegel clearly has an important say in the matter, Snapchat’s investors, which include Benchmark, Lightspeed Venture Partners, and General Catalyst, would have to be ok with the choice which they clearly are. So it’s fair to say that this wasn’t necessarily a foolish decision, even for a company with no visible revenue as of yet. Bottom line: they can and probably will, get more money elsewhere.

The personal reasons for Snapchat turning down Facebook and Google

They don’t want to be micromanaged by Mark Zuckerberg. Anyone who has been an entrepreneur can tell you that selling a company comes at a heavy cost, no matter how much money you make on the deal. Had Snapchat accepted an offer from Facebook or Google (or any other company they consider selling to in the future) the reality is that the founders lose control over their product. And while Facebook and Google might have brilliant visions for how they would use the app, there’s no guarantee that it would have aligned with what Snapchat’s founders had in mind. Or that it would have been successful at all for that matter. There have been many cases of behemoths like Facebook and Google snapping up promising startups, only to leave them on the shelf when they can’t figure out how to make them fit into the overall big picture (Dodgeball, anyone?). For any founder who has put blood, sweat, and tears into a product and tasted the kind of acclaim Snapchat is having, the prospect of giving up control and retreating into the shadows is understandably hard to swallow.

Would Snapchat have been a good buy for Facebook or Google?

Yes…and no. The initial question is, “why did they want it in the first place?” and the fundamental answer is this:

Those teens who have little interest in Facebook are increasingly cognizant of the fact that everything you do lives forever on the internet, hence their love for the Mission Impossible-esque self destruct functionality of this application; with Snapchat, you can afford to be indiscreet. But had Facebook or Google bought Snapchat and left it as a separate product (a la Instagram) it would have been doomed. There would have been no way to monetize it since privacy is the whole point of the application; you can’t target ads against content you can’t see that will momentarily self destruct anyway. However, integrated as a feature into Google+ or Facebook, it would have had tremendous value and might even have had some success in luring the teenage demographic into the fold.

However, compelling functionality aside, it’s possible that both companies dodged a bullet when their offers were rejected. First, there’s the ongoing lawsuit between co-founders Spiegel and Murphy and their original third partner, Stanford classmate and frat brother Reggie Brown. This can and probably will be resolved with a massive settlement of some kind, much like Zuckerberg’s similar discord with Eduardo Saverin. A more likely and more disquieting monkeywrench is the FCC’s current investigation into the possible use of Snapchat for child pornography not to mention its potential for human trafficking, insider trading, and terrorism.

Are most users of Snapchat using it for innocuous purposes like gossip and sexting? Sure. But the privacy feature of the app also makes it appealing for all kinds of nefarious purposes and you can bet that the FCC will be looking closely at it for the foreseeable future which is scrutiny neither company want or needs.

So what does the future hold for Evan Spiegel & Co.?

It remains to be seen. Snapchat holds a trump card with its patent on single mode visual media capture but not on disposable media capture (though apparently AT&T is at work on one). So there’s nothing in theory that would stop Facebook or Google from developing their own competing solutions. But Facebook has already been down the roll-your-own road with Poke and really, more than half the justification for this acquisition was the installed user base of teens and young adults. So what either Facebook or Google will do from here is anyone’s guess.

Snapchat’s future path is a bit clearer. We’re in agreement with our friend David Berkowitz of MRY that advertising is simply not an option. Snapchat users won’t accept it and as we’ve already established, integration of ads would destroy the app’s inherent value proposition. The only real path to revenue for the app is a premium version or better yet, a subscription model. Though we believe that an acquisition, if not by Facebook or Google at a higher valuation, then by an as-yet-unseen third party, is the most likely outcome. And probably the best outcome for investors overall.

What’s really important though, and what we’re thinking on here at Token is the basic premise that Snapchat has established which is that now, more than ever, users care about control of their data. Being in control of what you put out there via any kind of digital medium is of the utmost importance to upcoming generations of users. Any kind of of product or service you develop will need to put ultimate control of the data in their hands.

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