Snapchat, a rapidly growing messaging service, recently
spurned an all-cash acquisition offer from Facebook for $3 billion or
more, Evelyn Rusli reports. (Photo courtesy of Snapchat)
In a sign of the fervor once again
rising around Internet startups, the 23-year-old CEO of a two-year-old
company with no revenue has rejected a $3 billion buyout offer.Snapchat Inc. co-founder Evan Spiegel in recent weeks spurned an all-cash offer from Facebook Inc. FB +0.04% for close to $3 billion, according to people briefed on the matter. The offer, and rebuff, came as Snapchat is being wooed by other investors and potential acquirers. Chinese Internet giant Tencent Holdings Ltd. TCEHY +4.16% had offered to lead an investment that would value Snapchat at $4 billion.
Mr. Spiegel's company has no sales and no business model—but it does have a smartphone app that delivers hundreds of millions of messages, mostly from teenagers and young adults, that disappear in 10 seconds or less.
It is unlikely that Mr. Spiegel will consider an acquisition or an investment at least until early next year, the people briefed on the matter said.
A Snapchat spokeswoman declined to comment.
Mr. Spiegel, a lanky Stanford University dropout, is holding out because he hopes his company can get an even higher valuation, said the people familiar with his decision. He thinks Snapchat's user numbers have more room to grow, and is encouraged by the high level of activity by current members, suggesting it isn't likely to fade soon, they said. This September, the company said its usage had nearly doubled, to 350 million messages, or "snaps," per day, up from 200 million in June.
The company doesn't disclose its number of users.
Snapchat's suitors have circled at a time when investors have shown rising exuberance for social media, and mobile-messaging upstarts in particular. Twitter Inc., TWTR -1.59% an unprofitable short-messaging service, has a market value of roughly $25 billion after its initial public offering last week. Pinterest Inc., an image-sharing app, last month raised $225 million from investors who valued the company, which also has no revenue, at $3.8 billion.
Selling a tech startup can be remarkably hard for many founders, even with so much money on the table.
Snapchat joins a distinguished league of startups that have shot down multibillion-dollar offers. Groupon Inc. GRPN -0.08% spurned Google Inc. GOOG -0.16% 's nearly $6 billion bid in 2010. Facebook and Twitter also turned down several acquisition offers over the years. All of those companies ended up being worth more money on the public market.
But not everyone makes the right bet. Digg, a social-media pioneer, was once valued at more than $160 million and reportedly fielded acquisition offers at as much as $200 million. Its founder, Kevin Rose, landed on the cover of BusinessWeek in 2006 at age 29. But the news aggregator began to lose its audience as Facebook and Twitter emerged, and it ended up selling for about $500,000 last year to New York technology development firm Betaworks.
The dot-com boom is littered with stories of companies turning down outsized offers with dreams of going public, only to fall apart during the bust. In 1997, News Corp. NWSA +2.96% reportedly offered to pay up to $450 million for PointCast Inc., whose "push" technology was heralded as revolutionary in the media industry. The company promised to deliver customized news and information over the Internet to a computer user's screen.
PointCast turned down the offer and pursued an initial public offering, but it later pulled those plans and demand for its software waned after the technology clogged corporate networks' bandwidth. It sold for just $7 million in cash and stock in 1999 to LaunchPad Technologies Inc.
"There is no shame in getting an Instagram result, but there is tremendous glory in building a stand-alone multibillion-dollar company," said Shervin Pishevar, an entrepreneur co-founder of venture-capital firm Sherpa Ventures. In 2012, Facebook paid nearly $1 billion for Instagram, enriching two 20-somethings who launched the photo-sharing social network less than two years earlier.
Mr. Spiegel thinks that Venice, Calif.-based Snapchat has the makings of one of the winners. Snapchat specializes in ephemeral mobile messages, including text or photographs that disappear after a few seconds. The service hasn't generated any revenue, but it is especially popular among people aged 13 to 25, who use the app to send messages and images to friends.
Facebook had earlier offered to buy Snapchat for more than $1 billion, the people briefed on the matter said. In recent weeks, Facebook representatives contacted Snapchat again to discuss an all-cash offer that would have valued Snapchat at close to $3 billion. At that price, it would be Facebook's largest acquisition to date.
Facebook is interested in Snapchat because more of its users are tapping the service via smartphones, where messaging is a core function.
Facebook has rapidly increased the share of its revenue coming from mobile advertising, but said last month that fewer young teens were using the service on a daily basis.
Facebook might also want to keep Snapchat out of the hands of rivals.
Tencent, a diverse Chinese Internet company, owns WeChat, a major messaging service in China, and has a stake in KaKao, a popular South Korean app. It was vying to lead a group of investors that had offered to invest $200 million in Snapchat at a valuation of roughly $4 billion.
Why could Snapchat be worth even more than $3 billion? The temporary nature of its messages offers a unique appeal, say some prospective investors in the company, because it is more private and reduces the friction to share.
Impermanence may also resonate especially strongly with young users who have grown up acutely aware of the repercussions of social media.
Still, it isn't clear how Snapchat might make money. One path to revenue might be helping marketers craft messages that speak to the service's young users.
Instead of static banner ads, the personal nature of the service makes it more suited to narrative content, like stories and characters who interact directly with users, says Julie Ask, principal analyst at Forrester Research. "If you can create content, whether it is a photo or a video or a story, and get it onto one of these instant messaging apps, it has the potential to go viral so fast because the community of users is so big," says Ms. Ask.
Some advertisers are already taking the bait. To promote its recent film "The Wolverine," Twentieth Century Fox this month began a Snapchat account for the adamantium-clawed superhero where it reveals details about the character's past in short bursts.
"Right now, people think of Snapchat as either a very personal messaging tool or something that's a little bit more risqué," says Mark Pytlik, CEO of New York-based digital ad agency Stinkdigital.
Mr. Pytlik hasn't seen any demand from his clients wanting to run campaigns on Snapchat and thinks most marketers will be turned off by the ephemeral nature of Snapchat messages because "branding is about building a long-term message," he says.
Snapchat took a step toward bringing marketers on board in October, when it began offering a new tool to link together a series of snaps into a story. But the company has yet to offer any formal program for advertisers or discuss any plans to charge marketers.
Snapchat may be today's darling but the risk is that as the market for mobile apps matures, Snapchat could just be one of many.
Benedict Evans, an analyst at Enders Analysis, says the mobile app market for acquirers like Facebook is becoming a fierce game of whack-a-mole. He predicts more young apps will achieve Snapchat's velocity because it is becoming easier and easier for mobile apps to scale as the number of smartphone users grows.
"There are going to be a dozen companies that look something like this, and Facebook can't buy them all," said Mr. Evans.
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