Here's the short version. A small company called Snapchat was offered a $3 billion buyout by Facebook yesterday (yes, that's a "B").
Snapchat said "No Thanks" even though their userbase is relatively small compared to Instagram and Twitter and they aren't even profitable.
Snapchat offers a mobile phone app that allows you to take a picture, share it online, then after a few minutes it disappears; very handy for those college students who have had a few beers and fewer brain cells and intend on getting a job someday.
So why would Snapchat turn down $3B, triple what Google paid for YouTube? For that matter, why would Facebook make the offer in the first place? Facebook has a lot of money, but they aren't stupid.
I had some thoughts on the matter, but then a colleague published this on his Facebook page. He pulled my fuzzy thinking and absolute clarity.
Kyle Graham, kudos to you. Here is his answer in its entirety:
|Kyle Graham - brainiac|
[KNOWLEDGE BOMB] Lately, a lot of people have been scratching their heads as to why Facebook offered Snapchat $3B to purchase them, and why Snapchat turned them down. Seems crazy, right!?!?! Especially for a seemingly unknown outfit.
Well, not so much...
Let me break it down.
This actually isn't that new. Back in 1997, Microsoft scooped up Hotmail for $400MM (then worth barely anything...CRAZY at the time), Skype was scooped up for $2.6B in '05 by Ebay. GeoCities by Yahoo in '99 for $3.56B. YouTube for $1B in '06. And more recently, Instagram for $1B last year.
The list goes on-and-on...
Makes no sense right?
Well, here's the deal.
Facebook, Google, Yahoo, Twitter, etc. are all in an all-out-WAR for control of the Internet.
It's not about traditional valuation, EBITDA, etc. That stuff is pointless in these cases...
You see, there's this phenomenon seen especially in the social networking world called the "Network Effect" which basically means the value of a network becomes exponentially more valuable the more people that are on the network. In other words, for every additional user that signs up for Snapchat, that network becomes exponentially more valuable.
Combine that with the viral nature of these networks, you get a situation where the VALUE of these networks climbs EXPONENTIALLY fast.
So the reason why these companies like Instagram and Snapchat are getting gobbled up so quickly and for so much cash, having made NO money is because of this very fact.
...but here's where it gets really crazy.
If Google, or Facebook, or any Internet giant *DOESN'T* acquire them FAST, with enough time the 'fledgling' network will become SO valuable it might actually eclipse Google/Facebook.
It's happened before (e.g. its the *very* way Google & Facebook started)
Also, there's a point in viral growth called the "saturation point," where it becomes literally IMPOSSIBLE for another network, no matter how much resources they throw at the situation, to catch up to them.
You can liken this phenomenon to a runner who's speed increases exponentially over time. Every second he runs exponentially faster than the last. Eventually he'll be running SO FAST that no matter what you do, you literally CAN NOT over-take him. This is what's happening.
The only way to stop the CRAZY growth of companies like Snapchat & Instagram is to buy them, and even then, you gotta hope you're not too late, or that the other party is too stupid to know what they have!
This is EXACTLY why Facebook came out of nowhere and is giving almighty Google a run for its money now (and arguably why Eric Schmitt got demoted).
...and this is **EXACTLY** why Google Plus never had a fighting chance. It was too late...Facebook reached saturation.
Bottomline, if these network companies DON'T get acquired in time, they'll be too valuable to be purchased.
This is why Snapchat turned down Facebook.
This is why Twitter turned down Facebook. TWICE! in the face of many 'experts' calling them 'stupid' for doing that. Now, they're valued at over $35B. Who's stupid now??
We live in some interesting times...
A time where a couple of geeks in a dorm can create a quick hit and topple over GIANT within a matter of a couple years.
...and the ONLY defense these giants have against it is acquisition.
They'll pay WHATEVER it takes.
And they don't even care what the service does. Disappearing photos, really??
So, as long as you can show significant network effects and hockey stick growth, the Internet GIANTS will be scared silly and throw money at you as a DEFENSE mechanism.
...cuz if they don't, you might be the next Facebook or Twitter.Thanks, Kyle, for sharing your insights and giving me permission to publish it here. I think you are spot on!
[shameless plug] Kyle built a piece of software (tenminutepages.com) that's brilliant. It uses WYSIWYG technology to create landing pages. I recommend it.