Rocketlike growth emboldens Snapchat

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Posted: Sunday, November 17, 2013 12:00 am

What business makes no money, has yet to pass its third anniversary and just turned down an offer worth billions of dollars? Snapchat, a social media platform run by a pair of 20-somethings who until last month worked out of a beachfront bungalow in Venice, Calif.

Thanks to today’s rabid rat race for the hottest social media startups, Snapchat has joined the list of tech companies — like Tumblr and Instagram — with no money coming in but multiple sky-high takeover offers. So far, Snapchat’s leaders have balked at the offers, according to three people with knowledge of the overtures, including a recent multibillion-dollar proposal from Facebook, the biggest social network of them all.

It’s not that they don’t want billions of dollars. In part, it’s because they think making a deal now would leave many billions more on the table.

The service, started in 2011 by Evan Spiegel and Bobby Murphy, two former Stanford fraternity brothers, lets users send photo and video messages that disappear after they are viewed. Snapchat quickly gained a reputation as an easy way to send sexually suggestive photos, but it also picked up steam among young users as a fun and easy way to trade photo messages.

The company has in recent months become one of the most sought-after businesses in the tech industry, getting attention from top Silicon Valley companies and venture capital firms, as well as international technology companies.

In the past, several startups found even greater success by passing up a billion dollars or more, including Facebook and Twitter. Even Twitter, with its red-hot debut on the public market, still has skeptics who question whether it can grow enough to justify its current market capitalization of more than $20billion.

But Silicon Valley is littered with many more entrepreneurs whose big dreams went unfulfilled, people who were at the helm of the next big thing and lost momentum before they could cash out.

“I think this is classic bird-in-hand versus bird-in-bush,” said Julie Ask, an analyst at Forrester Research. “Snapchat must believe the bird-in-bush is bigger.”

There are some suggestions about why Snapchat thinks it will be worth far more later than it is now. For one thing, Snapchat’s leaders think it might be one of the first social media companies to build its business around revenue beyond advertising.

On stage at an industry event in September, Spiegel said that he wanted to duplicate the success of overseas chatting applications like WeChat.

Many such companies, particularly WeChat and Line, have found ways to make money from their applications through virtual goods and games. WeChat, which is based in China and operated by a company called Tencent, allows its users to subscribe to brands like Starbucks and Nike and receive messages from them. Line, a Japanese messaging app, has $10 million a month in revenue from selling stickers that users can send to each other while chatting with friends.

But the decision appears to have also been influenced by one of Snapchat’s big venture backers, Benchmark Capital, according to a person close to the talks. Before leading an investment in Snapchat, Benchmark led an early bet on Instagram, a photo service, and was disappointed when Instagram’s founders decided to sell to Facebook for $1 billion last year. Despite the high price tag, the firm thought Instagram could have succeeded as a stand-alone company, or at least could have brought a higher offer.

Eight months after the Instagram sale, Benchmark switched tactics and placed an initial $13 million bet on Snapchat. Benchmark executives thought they might be able to profit from Facebook fatigue by investing in services like Snapchat that offered users — particularly teenagers — greater privacy.

It is those teenagers who most interest Facebook. In an earnings call this month, Facebook said its youngest users were using its service less.

Still, the news last week about Snapchat rejecting Facebook’s offer sent a small shock through the industry. Both Snapchat and Facebook declined to comment.

Snapchat and applications like it represent a coming sea change in social media, one not necessarily defined by shared or public interactions. These services present an antidote to mainstream services that are meant to capture life moments so they can be shared, liked and commented on. Snapchat’s appeal lies largely in the lack of permanence. It offers a reprieve from worrying about awkward or unflattering photos turning up unexpectedly.

Snapchat recently said that it now processed upward of 350 million messages a day. In February, the company was processing 60 million a day.

Other messaging services similar to Snapchat are also quickly gaining in popularity. WhatsApp, KakaoTalk, Kik, WeChat and Line, to name a few, have added hundreds of millions of users around the world in the last few years, and each continues to grow.

That rocketlike growth has emboldened Snapchat’s leaders to hold out for a better deal, and with a suitor of their choice, at least for now. One person with knowledge of the talks, speaking on the condition of anonymity, said one roadblock in the talks with Facebook was that Spiegel questioned whether he wanted to work for Mark Zuckerberg, Facebook’s young billionaire chief executive.

In addition, Snapchat relishes being a successful company outside Silicon Valley. In December, when the company was still getting its footing in the social media market, Zuckerberg requested a meeting. But he traveled to Los Angeles to meet with the company, according to Snapchat’s founders, instead of them visiting him at his headquarters in northern California.

Shortly after the meeting, Facebook started a similar product called Poke, but Poke never took off. Even Facebook’s own stand-alone messaging product, called Messenger, has struggled to attain the same kind of momentum that rival messaging upstarts have gained.

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