Snapchat Will Probably Be Glad It Turned Down Facebook's $3 Billion - But It Was Definitely A Bold Bet!
After all, Snapchat is only two years old. And it has no revenue. And $3 billion cash for a company that is two years old and has no revenue is, in anyone's estimation, a boatload of money.
The instant consensus from the Twittersphere, not surprisingly, was...
"Insane!"
"Crazy!"
"Moronic!"
The news was also instantly held up as proof that technology is in a massive bubble and that this is just the 1990s all over again.
Well, before we get to that discussion, let's acknowledge that the Twittersphere's reaction to the Snapchat news is exactly the same reaction that Twitter always has to news like this.
And let's point out that this reaction is often dead wrong.
Many of the same people who were howling and ridiculing Snapchat's obvious stupidity yesterday are the same people who were howling about the absurdity of Twitter's multi-hundred million valuation five years ago (It's worth $20+ billion now), Facebook's multi-hundred million valuations in 2005-2006 (It's now worth $100+ billion now), and Facebook's decision to pay $1 billion for Instagram last year (The Instagram buy was one of the smartest and boldest acquisitions in history).
In other words, these folks always howl and rant and cry "bubble!" every time a big valuation is placed on an early stage company, especially one with no revenue.
And although these folks are sometimes right - sometimes investors and acquirers DO overpay for things and live to regret it - they are also often just giving voice to a knee-jerk opinion held by lots of clueless people who don't spend much time trying to understand the growth dynamics of some kinds of Internet companies.
Wait, what?
Could Snapchat ever be worth MORE THAN $3 billion?
Of course it could.
Snapchat is one of the fastest growing digital services in history. In only two years, it has amassed a user base of tens of millions of people who use it to send hundreds of millions of messages per day. It also has a powerful network effect: If you want to communicate with people on Snapchat, you have to use Snapchat. And it has many obvious avenues for eventual monetization. (Advertisements, for example. Or add-on services like those sold by the Japanese messaging company Line. And many others. As we pointed out in our "FUTURE OF DIGITAL" deck, attention is monetizable. And Snapchat has plenty of attention).
There is a lot of precedent for companies like Snapchat that initially have "no revenue" going on to be worth tens or hundreds of billions of dollars in relatively short order. And Snapchat is actually growing faster than any of those companies.
Nothing is guaranteed, and dozens of things could go wrong, but in a few years the world may look back on this as a "duh" decision, just the way the world looks back on Facebook's decision not to sell itself to Yahoo! for $1 billion, and Google's decision not to sell itself to Yahoo for $1 million, and so on.
That said, $3 billion is, by any measure, a lot of money.
It's not just the dime-a-dozen "tens of millions" or "hundreds of millions" that many Joe Schmo successful founders and investors in Silicon Valley pocket after big-ticket exits. This is billions of dollars, which is significantly more rare.
So Snapchat decision did make even sophisticated Valley veterans open their eyes wide and say, "Wow."
But it's not "insanity." It's just a very bold bet.