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.