Much of the financial and tech community was shocked late last year when Snapchat, a newer app designed to allow users to send pictures to their friends that are immediately destroyed, turned down an acquisition offer from Facebook for $3 billion.
What could cause Snapchat and its CEO to make such a decision? How is $3 billion not enough money for this relatively new company?
The January 20, 2014 issue of Forbes magazine features an interview and cover story with the two main founders of Snapchat, Bobby Murphy and Evan Spiegel. It is definitely one of the most in-depth interviews conducted with the founders so far, and it contains several insights as to why they turned down Mark Zuckeberg’s offer.
A little more than a year ago, Zuckerberg reached out to Evan Spiegel in a secret attempt to meet him. After flying into Spiegel’s hometown, the two met in a private apartment to discuss the future of Snapchat. More importantly, Zuckerberg came to the meeting in an attempt to scare Spiegel. Zuckerberg announced to Spiegel that Facebook had developed and was about to release an app to directly compete with Snapchat – “Poke.” The app was supposed to basically do everything that Snapchat already did. In the words of Spiegel, Zuckerberg was sending the message: “We’re going to crush you.”
Interestingly, the rollout of the new Facebook Poke app did not have the resonance that Facebook predicted. The first day of its appearance, Poke was the number one downloaded app on the iPhone app store. A mere three days later, Snapchat’s position increased, and Poke dropped out entirely from the top 30 apps. Today, widely considered to be a failure, Poke is a mere footnote in the history of social media apps.
Some of this background should help explain why the founders of Snapchat (both of whom owned about 25% of the company at the time of the offer) turned down Facebook’s $3 billion. Despite the potential payout of $750 million for each of the two founders, Spiegel and Murphy determined that Facebook was growing increasingly desperate after their failure to develop and release a competitive app, and that $3 billion was too small an amount of money to address that desperation.
Spiegel explains, to some degree, the source of their decision. “There are very few people in the world who get to build a business like this,” says Spiegel. “I think trading that for some short-term gain isn’t very interesting.” It is an interesting world in which we live if $750 million can be dismissively referred to as “short-term gain.”
However, just like Facebook, the founders of Snapchat are also involved with litigation from another individual, Spiegel’s fraternity brother, who claims that he came up with the idea for Snapchat in the first place. The brother, Reggie Brown, reportedly said to Spiegel: “I wish there was an app to send disappearing photos.” According to court documents, Spiegel was visibly “animated” and referred to Brown’s statement as a “million dollar idea.” That very night, the pair went out to find a developer. The three men worked on the app until it was unveiled in one of Spiegel’s design classes, and it received a lukewarm response.
Unfortunately, as the terms of the company’s equity structure were being created, Reggie Brown asked for 30% of the company. Brown apparently contributed the original idea of the app, the name at the time (“Picaboo”), and the Snapchat ghost logo. After Spiegel and Murphy disagreed, Brown was dropped off the team entirely, and the pair have recently filed a restraining order against him. Brown is suing Snapchat for over $1 billion.
Much of this story may remind readers of Instagram, who sold their company to Facebook for $1 billion and may now be regretting it. According to the above-mentioned article in Forbes, some believe that Instagram could be worth as much as ten times that value. This may provide another reason as to why Snapchat refused to go along with Facebook’s offer.
At the end of the day, it may be impossible to ever truly know why Snapchat turned down the money. However, we can make some pretty good guesses as to the reasons. The real question is: will they ever be able to see that amount of money again? In retrospect, will it have been a good decision? Time will tell.