Snapchat and the Logic of Turning Down $3 Billion

In July 2006, a two-year-old company received the offer of a lifetime: a $1 billion acquisition offer from Yahoo. While its board was ready to accept the offer, its founder and CEO instantly dismissed the offer. “I don’t know what I could do with the money,” the CEO said. “I’d just start another social networking site. I kind of like the one I already have.”

That company, of course, is Facebook, and the CEO is Mark Zuckerberg. Today, that decision seems wise, considering the company’s current $118 billion market cap. Zuckerberg has cemented his place among the greatest entrepreneurs of all time as a result.

But nobody would have blamed Zuckerberg if he had sold to Yahoo in 2006, just as nobody can blame Kevin Systrom for selling Instagram for $1B. While Instagram has thrived since its acquisition, it’s easy to see how it could have become a Groupon, whose decision to spurn Google’s $6B acquisition offer seems flawed in hindsight.

Today, the rumors are flying around Snapchat, the hot new mobile social networking startup with millions of users and hundreds of millions of “snaps” and growing. It reportedly spurned a $3B all-cash acquisition offer from Facebook recently.

My Twitter stream is filled with commentary on the rumor that boils down to either “I’d take $3B” or “the founders of Snapchat have balls”. But let’s put the mindset of the founders into context, because while turning down a $3B acquisition offer is unfathomable to most of us, it makes logical sense for Snapchat.

1) Snapchat is still growing rapidly: If Snapchat’s growth were slowing down, the decision to sell would be significantly harder. But when you’re sitting on a fast-growing entity that should only increase in value, taking a $3B offer can look small in just a few months.

2) The founders will cash out regardless: From the last line of the WSJ report: “If Snapchat pursues an investment early next year, Spiegel has told investors he would like to sell a block of his own stock, according to people familiar with those conversations.”

Spiegel and his team are going to make millions either way — more than enough to live a happy and comfortable life. It frees the team to “go the distance” because even if Snapchat totally collapses, they will never have to worry about money again.

3) The chance to become one of the greats: Q: How do you become the next Jack Dorsey, Mark Zuckerberg or Steve Jobs? A: You take your company all the way to IPO.

Changing the world is certainly on the minds of the founders of Snapchat. So is legacy. While you can certainly change the world as part of a larger company, it’s easier to fulfill your vision when you’re CEO. These thoughts must certainly slide through the thoughts of the founders. They’re only human.

Turning down billions of dollars seems insane on the surface, but can have a payout far greater than money if you succeed. Just ask Mark Zuckerberg.

Regardless of your opinion of Snapchat, it’s tough to blame the founders for wanting to hit the Grand Slam. They have a rare opportunity to build a legacy and change the way people communicate. I wish them the best of luck.

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  • http://www.microsoft.com/bizspark Douglas Crets

    This is really good. Let’s assume they want to build Snapchat to be a kind of utility of the wireless world, like Twitter is a utility that delivers realtime consciousness to the web. An IPO makes perfect sense, but also, it’s very clear they don’t see Snapchat as a feature. It’s like, electricity is basic and a need, but it also would look like a feature if you saw it in the context of something that you put in a house. Let’s say you change the view then.

    Snapchat is a feature of the house that is one large fragmented civilization. It’s still a business. When people need something, they will start paying for it to keep it and, in that sense, it keeps the lights on for those corners of the civilization.

    • Jordan

      Very well said Douglas.

  • NE_Heights_Elitist

    Mark Zuckerberg is no Steve Jobs. Lay off the pipe.

  • http://www.kevinfadler.com/ Kevin F. Adler

    good post.

  • http://www.microsoft.com/bizspark Douglas Crets

    Would love to see Ben’s take on this now that WhatsApp was bought. What effect would this have on the “road to IPO” theory for Snapchat? Is Snapchat now worth more, and ripe for a Yahoo! acquisition?