Why Did Snapchat Turn Down $3 Billion?

Would you pay a couple billion dollars for this?

Would you turn down $3 billion?

According to The Wall Street Journal, the founders of communications-startup Snapchat did just that, after Facebook approached them about a possible buyout. The newspaper quoted anonymous sources “briefed on the matter” for its information. Snapchat CEO Evan Spiegel has reportedly tabled any discussion of an acquisition, or even a major round of venture funding, until early next year.

While Snapchat earns no revenue, it’s proven a popular service for sending messages to friends. While other messaging apps store texts and images in the cloud, all missives sent via Snapchat vaporize after a short, preset amount of time. Although Facebook already has Poke, a feature that wipes out messages after a few seconds, Snapchat’s millions of users would strengthen Facebook’s already-ambitious forays into the mobile and messaging arenas; the fact that the startup’s software is popular among teens can’t hurt, either, as Facebook is reportedly struggling to hold onto that demographic.

Spiegel and his crew have some very good reasons for turning down that reported $3 billion. For starters, it’s likely that someone will come along with a better deal: the Journal reports that a Chinese e-commerce company “has offered to lead an investment that would value two-year-old Snapchat at $4 billion,” and Facebook had already raised its bid from an earlier $1 billion. In theory, if Snapchat can keep growing its user base, it could end up in the same league as Twitter, which just launched a highly lucrative Initial Public Offering that valued it at $25 billion.

That’s a big “if.” Take the case of Groupon (please), which famously turned down a multibillion offer from Google more than three years ago. In rejecting the deal, Groupon’s executives figured they still had more room to grow the business. And for a couple years, it looked as if they’d made the right bet: Groupon expanded at a healthy clip, eventually launching an IPO that made a whole lot of people very rich. But concerns over its business model, along with some disappointing earnings reports, forced the stock price sharply downward. With concerns raging over the company’s poor performance, Groupon CEO Andrew Mason was eventually fired in February 2013.

Groupon is a cautionary tale, in other words, about the dangers of not taking a lucrative buyout offer. But Snapchat’s defenders point to Facebook, which in its early days famously refused to sell itself to a number of larger firms; today, of course, the social network is a tech behemoth. For every company that held out and profited, another thousand burned out and became nothing—those are the odds confronting Snapchat at this crucial point in its story.

Most people would have taken the $3 billion.

 

Image: Snapchat

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