If Facebook offered you $3 billion in cash for a two-year-old start-up company, which has no revenues, would you turn them down?
The short, and perhaps simplistic, answers probably lie with Twitter and teens.
Facebook recently admitted that it's losing younger teens. Facebook CFO David Ebersman told Wall Street analysts on October 30 that the social media behemoth had seen "a decrease in daily users specifically among younger teens.” That's the first public admission of what many industry observers suspected. That same day, Facebook stock took a tumble.
Teens are flocking to Snapchat. TechCrunch reported in September that Snapchat "users are sharing 350 million photos per day, according to CEO Evan Spiegel. That figure is up from 200 million in June."
What makes Snapshat popular to teens? It's a smartphone app that shares photos and text messages which disappear within 10 seconds. It's private. Unlike Facebook, there's no enduring record of your silly (or stupid) snaps.
Spiegel knows that he has a growing audience of teenagers that Facebook desperately, and increasingly, wants. He's banking on that audience getting much bigger and more valuable.
While $3 billion is a lot of money, Speigel may figure he can hold out and make a lot more. Look at Twitter's recent IPO.
Twitter stock went public earlier this month and the unprofitable company is now valued at $29 billion. That's a lot bigger number than $3 billion.
"Twitter just made it clear that the IPO window is open and a lot of success can be had," says Ira Rosner, an attorney and shareholder for Greenberg Traurig, a law firm that helps prepare companies for IPOs. Roener told the Associated Press that "there is no question that a successful offering encourages other offerings," he says. "It gets people excited and it creates buzz."
But how high is up? Some are already cautioning that the tech IPO market is moving down the same path as the last dot-com bubble, where big money wildly chased start-ups with little or no profits.
Larry Chiagouris, marketing professor Pace University's Lubin School of Business in New York told AP:
"If you fast-forward beyond the next 24 months, people will realize that these companies just aren't going to make a lot of money," he says. "Advertisers are not putting a large portion of their budgets into these companies." He adds, "People are chasing the dream of profits as opposed to any evidence of profits," Chiagouris says. "And it's a hope, it's a wish, it's a dream, but that's all it is right now."
Spiegel took a gamble by turning down Facebook's offer. The IPO market could turn south before Snapchat goes public. It's not clear that advertisers will pay for ads that disappear in 10 seconds. Or notoriously fickle teenagers may move on to the next "cool thing" before Snapchat can go public or gets another $3 billion offer.
If any of these things happen, Snapchat may end up as the next Digg, a news aggregator that reportedly turned down an offer of $160 million and was later sold for just $500,000, as the Wall Street Journal noted. But the WSJ also reports that Snapchat may get a $4 billion offer soon from another group of investors.
Will that be enough for Spiegel?