How Snapchat and Instagram Could Doom Startups

What’s cooler than a billion dollars?

Fifteen billion dollars.

Someone in Silicon Valley or Silicon Alley must have made that joke over the past few days, after a handful of investors Tweeted that Instagram, which Facebook famously acquired for a cool billion dollars, could be worth anywhere from $5 billion to $15 billion today.

“Instagram likely worth $15B today minimum,” investor Eric Jackson wrote to his Twitter followers late last week, before telling a Business Insider reporter that he arrived at that figure by comparing the photo service’s 150 million users to Twitter’s 236 million chatters, and then dividing the latter’s $30 billion valuation in half.

Another investor, Shervin Pishevar, priced Instagram at a lower-but-nonetheless-impressive $5 billion. “It buttressed FB stock & gave its mobile strategy legs. Insanely smart, cheap acquisition by [Mark Zuckerberg],” he Tweeted.

Which brings us to Snapchat, whose founders reportedly arrived at the same point as Instagram—namely, whether to sell to Facebook—and decided to turn down a $3 billion offer. According to The Wall Street Journal, which 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.

Snapchat earns no revenue, but it’s proven popular among users (particularly teenagers) who want their online messages to vaporize after a short, preset amount of time. Facebook already replicated Snapchat’s functionality with its Poke app—what it wants is that enormous collection of users, and never mind the difficulties of monetizing a platform dedicated to erasing any media almost as soon as it appears. Others could be in the market for Snapchat as well, with Google (reportedly) offering up a hefty $4 billion.

Most people wouldn’t hesitate to sell out for that sort of cash. But Snapchat’s founders evidently think they can score a better deal within the next few quarters. If they manage to sell their startup a year from now for twice as much, they’ll be lauded as extraordinarily smart businessmen—perhaps smarter than the folks at Instagram who sold for a “measly” $1 billion.

But for other startups in the space, the Snapchat and Instragram stories won’t do them much good. Propelled by dreams of ever-increasing millions (perhaps billions!) startup founders could end up turning down perfectly good acquisition offers in favor of continuing to bootstrap—and find their businesses eroding and imploding, as the market for their particular app or service either fades away or (more likely) ends up crowded out by competing software. The startup market is a shark-tank, and most of those who don’t get out of the water as soon as possible are eaten, dreams of grandeur or no.

In other words, Snapchat is the anomaly—not something that should be taken as a rule.

 

Image: cdelacy/Shutterstock.com

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