It's Hard To Believe This Sharp, 5-Point Business Memo Was Written By A 23-Year-Old
Just three years ago, Evan Spiegel was a senior at Stanford University. Today, he runs a mobile application worth $10 billion, Snapchat. Spiegel turned 24 in June.
Going from a college frat boy to the CEO of today's hottest new startup isn't easy. Spiegel has been painted as tactless, spoiled and sexist by the press, largely due to a lawsuit brought on by his former fraternity brother and leaked emails from his Stanford days.
But new email exchanges written by Spiegel to his board members paint an entirely different picture. The CEO of Sony, Michael Lynton, was recently the victim of a cyber attack which unearthed his work emails. Lynton is also on Snapchat's board, so there are a number of exchanges between him, Spiegel and other board members that have been leaked.
One email exchange between Snapchat board member Mitch Lasky and Spiegel, dated November 18 2014, blew Lynton away.
"I couldn't have written this at 23," Lynton commented. "Very impressive."
So, what did this masterful email say?
Spiegel was being advised by Benchmark partner Mitch Lasky, who is twice Spiegel's age, to focus on growing Snapchat's user base instead of trying to monetize the startup. Spiegel disagreed, and underscored how important revenue generation is, particularly when there could be a tech bubble.
"For Snapchat to capitalize on market conditions in next 3 years, it is imperative that we become a revenue-generating company," Spiegel wrote. "That will allow us to attract the best talent and prosper despite extreme scrutiny on traditional social media that will have failed to deliver on $$$ dreams."
Lasky also told Spiegel he could raise money at "any valuation he wanted" short of $4 billion. Spiegel replied that he'd like to keep it a more modest $800 million.
Lasky also suggested Spiegel hold an all-hands staff meeting to discuss rumors of Snapchat turning down a multi-billion-dollar acquisition offer from Facebook. Spiegel replied that the meeting had already taken place earlier that morning.
It's not easy to have enough confidence and business savvy to push back on someone with 20+ years of experience running and investing in businesses. Here's the respectful and smart exchange between the two.
Here are points Mitch Lasky made to Spiegel (Business Insider has bolded the bullets to make it easier to skim):
And here's Spiegel's response.
1) I 100% understand your perspective on the raise. That said, I would prefer to keep the valuation of the co at $800mm going into a potentially turbulent time in the market. We have 13 months runway, and with a minimally successful monetization scheme we will be able to comfortably extend that. I don't think that monetizing the business will affect our ability to raise at high valuations -- Facebook was bringing in money in the very early days and didn't have any problem attracting high valuations. If anything, we need to monetize the business in order to create leverage for future financings as needed. In the next two weeks I want to focus on the monetization product rather than a potential financing. It's almost there and it's really awesome. If we have a business that is sustainable over the next 2-3 years we will be in a much stronger position. I think 409(a) issues are overstated and that we will benefit from having lower strike price as we hire over next few years. Especially if that price becomes based on revenue rather than VC valuations. I don't think $3bn valuation for fundraising is going to go away - esp because TC and others are already pricing in market volatility. You've seen the data - we have high engagement and high retention product with tremendous growth ahead of us. Monetizing the business now only makes a stronger case for the permanence of our product. I think most important thing I want to communicate to you is that this is not an emotional decision and is not about "proving it" - this business needs to make money. The argument of grow now, monetize later doesn't make sense because we have reached abnormal levels of growth and our monetization product is value-added. I'd rather not burn another $100mm of OPM before we find out whether or not we have a business. If we can build profitable biz w Twitter-scale, 30-person headcount, and major growth ahead we are not going to have a problem attracting additional capital. (This does not preclude necessity of building a much larger team).
2) I completely agree. Not interested in Zander. I am working with Daversa on CAO/COO role and meeting with 4 terrific candidates this week. Will report back on those meetings. As far as GC goes, I have my dream candidate and I think we can make it happen. I am calling him today to discuss but don't feel comfortable bringing him on until we are making money. We will be able to attract best (and risk-adverse) candidates if we can show a path to real revenues. I am moving Philippe to internal operations (we can discuss this on the phone, please do not discuss with him as I have not yet had this conversation with him) and I think he will be able to monitor cash flow while we look for CFO or VP Finance. We're not doing anything fancy - we just need to know if the amount of money in our accounts is increasing or decreasing. We have outsource CFO resource in Keating Consulting and the combo of Philippe+ Keating will get the job done for now.
3) We texted last week, planning on calling him today.
4) Talked to David this am, sounds like Jeremy will be following up with Tencent later in the week. David seemed to think deal could get done. As I mentioned earlier, I don'tcare either way but we would probably have to offer it to all shareholders to avoid potential lawsuit down the road. Could be more trouble than it's worth.
5) Happened at 10am.
As a note: my view of the market is as follows --
Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets - at these values, however, all tech stocks are expensive - even looking at 5+ years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10%+ increase in market value will be driven by momentum investors. At some point there won't be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks. Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars -- largely due to mobile advertising performance - especially App Install advertisements. This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded). VC dollars are being spent on user acquisition despite unknown LTV of users - a recipe for disaster. This props up Facebook share price and continues to justify VC investment in technology products based on abnormally large mkt cap companies (i.e. "If this company attracts just 5% of users that FB has, it will be HUGE" - fuels spend on user acquisition as user growth is tied to values). When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease - compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough. Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.
THAT SAID, we are still in very early days in mobile application market. I remember growing up wishing I had been a part of PC revolution - and I feel very fortunate to havethe opportunity to watch smartphones take off. Snapchat has become one of the top 5 mobile phone brands with Facebook, Twitter, YouTube, and Instagram.
For Snapchat to capitalize on market conditions in next 3 years, it is imperative that we become a revenue-generating company. That will allow us to attract the best talent and prosper despite extreme scrutiny on traditional social media that will have failed to deliver on $$$ dreams. Team is working overtime to drive revenue and innovate on core product - we have a solid 3-year roadmap that we intend to follow.
As a profitable growth company with a focus on mobile we will not suffer from opportunities to raise capital at outsized valuations despite market conditions. Strategically it is important for us to keep expectations low with an understanding that Snapchat may be valued on revenues going forward and that $800mm valuation for a two year old company is remarkable and already more than enough to grow into. With 13-15 months of runway extended by minimally successful revenue generation activities I think we are positioned to capture the mobile communication market.
I disagree wholeheartedly with the notion that mobile will be forever fragmented - we are the only differentiated messaging service in the United States and we will continue to provide a unique and innovative product experience. Snapchat is not valuable in the long-term because it is used by teens or because it is a threat to Facebook. It is valuable because it has fundamentally changed the nature of digital communication in <2 years and will continue to do so for the life of the Company (may it be long and prosperous).
Our focus in the immediate term is revenue generation, growth and product development.