According to a story on the WSJ, which has been known for their hyperbole at times, the guys at the popular photo and video application company, Snapchat, turned down an absolutely enormous offer from Facebook. According to th WSJ, the deal is that Facebook offered Snapchat $3 billion in cash for the company and that the Snapchat guys thought that they were worth more than that and weren’t interested in selling until next year.
This, to me, sounds a bit ridiculous that someone would turn down $3 billion in cash for a product that at this very moment doesn’t actually generate any revenue or any profitability. The truth is that Facebook is afraid of Snapchat much like they were afraid of Instagram. The difference is that Instagram only cost Facebook $1 billion, and even then, that evaluation seems absolutely absurd based on the company’s ability to generate revenue and profitability. At that time, Instagram was not profitable and hadn’t proven that their plans to be profitable would work, and they still haven’t to this day.
So, the claim is that Evan Spiegel had turned down Mark Zuckerberg for a $3 billion cash deal because he doesn’t believe that the company’s valuation has quite hit its peak. The problem with such a view of his company is that there is a possibility that something like what happened to Yahoo could happen to Snapchat. That the offer may be a one time deal and once turned down, there is no turning back.
The real truth is that almost all of the social media platforms out there aren’t making money. These include Twitter, Instagram, Snapchat, and even Reddit. The problem is that most people that use social media really don’t like to view ads and most of these platforms are not built with ads in mind from the very beginning. As a result, it makes it difficult for the companies to implement ads as an afterthought without pissing off users. Most of these guys are trying to build popular and easy to use social media platforms, not money making machines. However, it looks like Facebook is slowly starting to figure out how to monetize their platform, but that faces challenges with the growth of mobile and mobile apps.
Now, while Facebook and Snapchat haven’t officially confirmed or denied this story, it would be idiotic to turn down $3 billion in cash knowing the amount of risk and bubble associated with social media. If I were the founder of Snapchat, it would be time to let go of the app, take the cash and make everyone very happy. At the same time, nobody says that he couldn’t create a new Snapchat after his contract would allow him to leave Facebook. $3 Billion is a lot of money and there’s no way in hell Snapchat is worth even 1/10th of that. We’re clearly in a social media valuation bubble and the Facebook and Twitter IPOs are perfect examples of that.