Within technology and business news, a good deal of press has been made of Snapchat®, the photo sharing mobile app that allows for the temporary sharing of photos and videos with other Snapchat users. Most of the recent critiques have focused on Snapchat turning down a three billion U.S. dollar offer for the company from social networking powerhouse Facebook® (NASDAQ: FB), as well as the reported four billion dollar offer from Google® (NYSE: GOOG). Much of the reporting has centered on the possible mistake that Snapchat has made in declining remarkable amounts of money for fresh social networking start up.
It’s easy to look at turning down three billion to four billion dollars in cash as a rash and even foolish move (the publicized terms of the deal was a three billion dollar all-cash acquisition of the company by Facebook; the exact terms of the Google deal aren’t known). What some observers are missing in their analysis is that what Snapchat has done is at the core of entrepreneurship.
Breaking the refusal down into segments, here is how Snapchat has demonstrated their entrepreneurial spirit and may well have made a very canny business move.
Profitability
For successful entrepreneurs, in order to achieve profitability faster and to gain the clients they envision as being their core users, the focus becomes gaining references, use cases, best case scenarios, and in saving and making money. Snapchat has done that in directing resources and attention to improving the product and addressing marketing potential. Vocus® (NASDAQ: VOCS), a marketing software company, wrote about early adopters of Snapchat as a business-to-consumer marketing platform; among these adopters is Taco Bell®, part of Yum! Brands (NYSE: YUM).
Niche Markets
Again, entrepreneurs identify niche markets and gain victories in those spaces. There is less competition in niche markets, and the price for services offered are typically higher than what businesses and consumers will find in a cluttered market. Snapchat has found a niche where they are demonstrating efficiencies and gaining success, leveraging their initial customers to acquire new customers.
Outside Capital
Many entrepreneurs know first hard how complex a process raising capital is. In business, an owner or founder is not always able control who the company works with. As the organization matures and the conversations become more sophisticated, obtaining a partner becomes a part of that conversation. While there are a large number of stories that account where a venture capitalist as entered into a relationship, supporting the vision of the business, and after the funds are received, someone appointed by the venture capital firm comes in to direct the company. In Snapchat’s instance, Series A and Series B funding allowed for the development of a children’s version of the application, Snapkidz, and their “Banquo” version 5.0 release of the platform to both Apple’s iOS and Google’s Android operating systems in July of this year.
Valuation
In February 2013, Benchmark Capital valued Snapchat at approximately $60 million. By mid-July of 2013, Snapchat was reportedly valued at $860 million. These are both external valuations of the company. For an entrepreneur, what drives the drives financing decisions is internal valuation. In the case of the Facebook and Google offers, while both bids were generous, they matched the external market price of the time. As of October 2013, Snapchat was valued between the three and four billion offered by the social media network and the search engine giant. Snapchat believes the company is worth more than the money offered. Should another company approach with a dollar amount that exceeds what Snapchat internally values the business at, then that would be the opportune time for Snapchat to agree to a buy-out. It can be that simple.
Efficiencies
Operating as a privately held company allows for greater agility; could Snapchat’s pivot from productization to privacy have occurred as quickly if the company were a part of larger organization? Snapchat was able to address privacy concerns with the development of their Snapkidz app and in compliance with the federal Electronic Communications Privacy Act (ECPA). As a private company, Snapchat has greater latitude in out maneuvering competition, and in solving business problems. At present, Snapchat is able to focus on its own oscillation curves and not those of shareholders (though it should be noted that there are considerations to be made to stakeholder investors).
In entrepreneurship, not all decisions are rooted in the notion of getting rich. Some entrepreneurs have a different vision for their product or service, looking at the development and application to create value or to address a perceived gap in the market. The decision to sell, when to, who to, and why to, is unique to each company. For some, it is similar to establishing a friendly relationship. If an entrepreneur will have a continued presence in the company, the process may come down to talking to people, getting to know them. Who are the key operators in a prospective parent company (or partner)? Is intellectual property a roadblock to any agreement? Documentation such as non-disclosure agreements and do not compete clauses are ultimately only as valuable as the person that signs the agreement. There is no actual science to when and where a company is sold. It is based on instinct and this, naturally, is different for each entrepreneur, for each business. Simply stated, Snapchat’s decision to say no to the Facebook and Google offers may be put to being comfortable with the people on the other side of the agreement and Snapchat’s perceived value of their business. These are two basic components of being an entrepreneur and Snapchat should be acknowledged for adhering to that spirit. Declining billion dollar offers from two global technology leaders is a bold move.
Michelle Stone is the Marketing and Web Coordinator at AmOne, a leading online financial services company offering a free service to consumers and small businesses. Over the course of Michelle’s marketing career, she has held positions at companies ranging from venture capital-backed start-ups, to privately funded small businesses, to non-profits, and to publicly held multinational companies.
