Acquired - Episode 12: Snapchat

Episode Date: May 23, 2016

Ben and David tackle their first failed acquisition: Facebook's 2013 offer to buy Snapchat. They cover the fascinating story of Snapchat's creation and growth, their blossoming business model, how it would be different inside of Facebook, and what the future holds.Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Items mentioned in the show:The Inside Story Of Snapchat: The World's Hottest App Or A $3 Billion Disappearing Act?Inside Evan Spiegel's very private Snapchat Story

I've noticed our episodes have been getting a little longer. Yeah, they have. Do you think that's a problem? Maybe a little. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you?

Sit me down, say it straight Another story on the way Who got the truth? Welcome to episode 12 of Acquired, the podcast where we talk about technology acquisitions that actually went well. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. This episode, we're going to try and do something a little bit different.

Today, we're going to talk about one that didn't happen at all. Dun, dun, dun. This week we're going to cover Facebook's attempted acquisition of Snapchat for $3 billion a while back. In November of 2013. Yes. And it'll be cool because we have, not only the deal didn't go through, but we have the benefit of history to help us grade what would have happened if that offer actually

went through. We know for a fact what would have happened otherwise if Facebook didn't acquire Snapchat. That's actually easy. Alright, a few things before we get into it. One, please rate us on iTunes. It's how we grow the show and it's how we gain more listeners

like you. We also really appreciate any social sharing. If you like the show, please shout it out on Twitter or Facebook. And David has an update with a new thing we're trying. We have a new innovation here at Acquired. We just launched a Slack community that we're experimenting with. So if you'd like to join us on slack uh go to our website acquired.fm uh and from there you can sign up and join our uh community on on slack and uh we're uh we're gonna have some fun with it and see have some fun with it and see where it goes um yeah we we plan on doing kind of um like episode discussion in the week following.

We get a lot of email from people directly to us. And we figure, you know, that actually could be pretty beneficial to just have that in a group context. And Slack seems like a nice way to do it because a lot of us are already on it for our work day in and day out. We can just kind of passively subscribe and, you know, kind of watch the conversation. Yeah, and we'd love to see where it goes with the community. So you can use it. You can DM us with feedback or questions or just post in the community. Yeah, yeah.

And also a good place for if you have ideas for future shows that you want us to do. If you think you'd like to be a guest on the show, we've got a few great guests coming up that we're super excited about. So more stuff to come okay listeners now is a great time to tell you about longtime friend of the show service now yes as you know service now is the ai platform for business transformation and they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know,

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or going to servicenow.com slash AI dash agents. All right. Time to get into it. All right. Well, we tried to get guests for today, but both Zuckerberg and Spiegel were booked up, unfortunately. Yeah, or so we assumed. All right, I'm going to dive in with acquisition history and facts.

This might take a little longer because this is a long story here. David, do not scare them away. All right, so 2010, Evan Spiegel is a sophomore at Stanford, and he has just recently moved into the Kappa Sigma fraternity house that he had joined last year at the end of his, the fraternity he joined at the end of his freshman year. And across the hall, a guy named Bobby Murphy,phy who's a senior uh is living there and so they uh they start hanging out they become friends and murphy recruits evan uh bobby recruits evan to work on a social app that he had an idea for inspired by google plus what unsurprisingly that goes nowhere time goes on and uh evan uh evan's still at stanford um

and he's actually he's he's doing great at stanford um so he's an undergrad and uh he ends up majoring in product design and david kelly becomes his advisor uh david kelly's the founder of the d school yeah founder of the d school. Yeah. Founder of the D school at Stanford and professor there and founded IDEO before that. And the D school, I have a bunch of personal history here having gone to Stanford for business school. The D school normally only admits grad students like undergrads can't take D school classes. But somehow Evan manages to get David to be his advisor. And that's not the only cool thing he does as an undergrad. He manages to find his way into becoming an auditor for a class at the business school, Strategy and Management 354, I believe, called Entrepreneurship

and Venture Capital, which was my favorite course in business school. It was awesome. It was taught by Peter Wendell, who was one of the founders of Sierra Ventures and was a longtime venture capitalist, and then co-taught by Eric Schmidt and Raymond Nazier, who was Google's first head of communications and worked for Eric, both at Novell before Google and at Eric. And it was an amazing class. We had amazing guest speakers come. People like Meg Whitman, like Biz Stone, like Peter Fenton, Scott Cook. And Scott Cook, when he came the year Evan was there, actually was so taken by Evan, by the young Evan Spiegel, that he hired him to be an intern to work on a project that he wanted to launch at Intuit. Wow. So no doubt a special individual, even before Snapchat. Even this was years before Snapchat. You could tell this kid had talent. He

was going places. So that summer, after Evan's sophomore year, he and Bobby team up again. They start a new company. This time, it's a website for aspiring college people, high schoolers navigating the college admissions process. It's called Future Freshmen. Why does this story feel super familiar? I feel like I've seen a movie about it, like kind of a failed idea before the big idea that took off. Maybe went to college together.

Something about somebody believing it was actually their idea laying claim. Yeah, there were some twins who... Yeah, they might have used a super similar law firm to the one here. I'm jumping ahead, but... Obviously referring to the social network here in facebook uh this the similarities are eerie okay so the future freshman that goes nowhere again uh april 2011 uh so it's it's evan's junior year and uh murphy bobby's graduated and um evan's hanging out one day and his fraternity brother also in kappa sigma reggie brown uh who is a classmate of evan's and a close friend um he uh he he comes running up to evan and he's like i've got an idea for an app oh oh and um and he's like i sent this uh i sent this picture to this girl uh last night

apparently this is all uh as we will discuss in a minute this is all in um discussed in the courts and legal filings um and i i got this idea for an app that you can make pictures disappear and supposedly evan gets really excited and repeatedly calls it a, quote, million dollar idea. One million dollars. Which he denies, I believe, in the court proceedings that he ever said anything about the million, but did acknowledge he was very excited. Yes. So they get really excited, the two of them, Reggie and Evan. They recruit Bobby again.

At this point, Bobby's graduated. He's got a real job. He comes back. He becomes the Cto of the company uh and evan just conveniently happens to be in a design class at stanford where uh they build a product in it and a company in the class and uh wait did was this actually part of his like he worked on this in a class yeah so they they they submit this this idea this app that they're building they decide to call it peekaboo. They submit it as their project for the class, as Evan's project. And the final day of the class, there's a panel of esteemed venture capitalists that judge all of these projects in the class.

And so they work really hard during the semester, during the quarter, and they get the app. You get a prototype done. It's actually, at this point, it's a website. It's not even on a phone. You have to submit a photo on a website. Right. You have to, like, click the choose file button on your computer. I mean, it's a mess.

It was janky. And it goes over like a lead balloon. The app of esteemed VC judges hates it. Apparently, according to an interview with Evan, one of them suggests maybe they should talk to Best Buy about a partnership. I don't know what that would be, maybe with cameras or something. So not an auspicious start to, um, the early days of Snapchat. Um, but undaunted, they decided to keep working on it. Uh, so they spend the whole summer, uh, after that quarter, uh, working on the app.

Um, and they work really hard and they grow the app. And by the end of the summer they have 127 users which having worked on a couple of consumer things that that um didn't work and actually working on one now it is like so terrifying when you see these kind of like super low numbers and then everything you're reading about in the press has insanely high consumer engagement and you're, I need three to four more orders of magnitude before this is anything meaningful. Yeah. And it's like,

it's almost inspirational that they only had 127. We're done all summer. So we're now roughly six months into the life of what would become Snapchat. They have 127 users. At the end of the summer, there's also unfortunately a big argument occurs between Evan and Bobby and Reggie and Evan and Bobby kick Reggie out of the company.

Um, then, uh, then the summer ends and that, that argument came right around the time or part of the same discussion is when they're figuring out their equity splits, right? Yeah. I think it was prompted by figuring out the equity splits, which boy,, I think it was prompted by figuring out the equity splits. Which, boy, is that a lesson for founders out there to have that thing early before people start to feel like they've already contributed and earned more than the rest of the group thinks. I mean, unless your strategy is really Machiavellian and you want to push your co-founders out of the company and get more equity for yourself.

Yeah, have that discussion early yeah we would recommend having pro tip have that have the equity discussion early um so the app's still going nowhere the summer ends evan heads back to stanford for his senior year um bobby's like hey i need a job so he takes a job at another startup in San Francisco. That blows my mind. They left the app in the store. They literally put it on ice. And around the same time, more bad news.

They get a cease and desist order from another startup called Peekaboo that I think is also in the photo space telling them they need to stop using the name. So Peekaboo is on the ropes at this point. they need to stop using the name so snapchat or peekaboo is on the ropes at this point you know they need to change the name they come up they brainstorm they come up with snapchat and they kept the ghost i'm i'm pretty sure brown actually came up with the the um the ghost logo that was his his contribution before he got kicked out of the company yep i think that's right um so one other thing happens in the fall as, as Stanford classes are starting again, uh, and it turns out to be really important and that's that Evan's mom, this is all, this is all according to articles on the internet, including a big, really good, um,

uh, profile in Forbes, uh, on, uh, on, um, on Evanan spiegel that that there's a lot of our source material here um evan's mom uh is tells her niece who's in high school in orange county so this is evan's cousin who's a high schooler in orange county about this app that evan's working on and her niece downloads it and uh thinks it's really cool and starts using it with her friends in high school and and one of the reasons that they start using it is that you don't need to use it on a phone you can use on an ipad um because you know it works it works on ipads too and and with the ipads that their school their you know tony uh private school in orange county had given them they had them locked down so you couldn't like you know text you know, Tony, uh, private school in Orange County had given them, they had them locked down so you couldn't like, you know, text, you know, use iMessage. Yeah. I think I read something.

They, they also made it so you couldn't install Facebook, which is actually, it's incredibly ironic that the fact that those iPads didn't have Facebook is why they needed a different way to communicate. So they installed Snapchat. So they installed like this, like cousin's app so that they could text each other during the day with their school iPads in Orange County. Wow. Crazy. So it sweeps through this school. Then it starts sweeping through other high schools in Orange County. Then it moves up the state.

And then it moves into other high schools in Northern California and in Silicon Valley. And the growth takes off. So by December of 2011, Snapchat is up to just over 2,000 users. The next month, January, 20,000 users. A couple months later in April, 100,000 users. A couple months later in April, 100,000 users. So there's an order of magnitude growth in a month and then another 5x the next month? In the next two to three months after that. Wow.

And this is the proverbial hockey stick. They have found it. So all of a sudden, they need to pay the server costs because they're hosting a lot of photos at this point. Well, and the incredible thing too, I mean, a lot of the time you're trying to make that product tweak to get you to that that hockey stick but this is truly like the product was stagnant and it was like it literally didn't change anything finding the right market and it's not like they even found it it's like it finally insidiously literally evan's mom found the right market for them wow i mean these things it's almost like you shouldn't try to learn lessons from these things as founders because they're such extreme outliers that that it's almost like like chasing a true chasing a unicorn to try and to try and duplicate

this sort of success. Good choice of words. So at this point, it's now April. They're at 100,000 users. I don't know if they're using AWS or Snapchat now uses Google Computer Engine, if they were using that at that point, but they got to start paying the server bills. Yeah, they're like by far the largest tenant, I yep on on on gce yep um today uh so they raise a seed round 485 000 from lightspeed at a uh four and a quarter million dollar valuation i think that was the pre-money

um so but effectively lightspeed gets about 10 of the company for less than $500,000. And at which point, Evan is furiously refreshing his Wells Fargo app, I think, in class as the story goes. And as soon as he watches it hit, he walks down, he says goodbye to the professor, and he drops out of class or drops out of Stanford like months before graduating. Yeah, it's April. Graduation is in like May, Juneune um yeah he literally drops the mic in the middle of class this is according to evan um once the money hits the bank account and walks out the door and never comes back yeah and if you were in that class we would love you to join the slack team and let us know how it went down but that's what we're going off of that's what we're going off of. That's what we're going off of. And so walks out, moves down to L.A., convinces Bobby

to come down. They shack up at his dad's house in L.A. They convince a bunch of their friends from Stanford to also drop out of school months from graduation, come down, join the company and start working on it. And then for basically the rest of 2012, that's when the core of Snapchat as we know it today gets built. So they shack up in LA, work for the whole summer. In October, they launch on Android. And when they launch on Android, they announced that they are now serving 20 million snaps per day in October of 2012. December of 2012, they add the next big pillar of Snapchat, which is video. And then also in December of 2012, Mark Zuckerberg has heard about this app, and he sends an email to Evan Spiegel.

He has, and it does seem that he had heard of it a little bit earlier, since kind of quietly, I almost said Microsoft, Facebook had been working on an app called Poke. They were reviving the old name of the feature that we all know from early on in Facebook use that really never gets used today to basically create a clone, and actually from a UX perspective, a very excellent clone of Snapchat. And when Zuck does meet with Evan, it's kind of an interesting story of how he gets there,

Zuck says, hey, why don't you come hang out at Facebook? Evan says, oh, next time I'm up in the Bay Area. Evan, I think, follows up and says something like, why don't you come down here? So Zuck actually flies down to to meet uh evan at snapchat's headquarters i think there's there's a whole story about them them getting like a private them renting a private apartment to have this thing but zuck walks in with a plan and he basically says hey here's how i would do snapchat um and sort of how i see your role in the world and how i could uh could see

this all playing out and it's this grandiose vision and it's quite impressive and he ends with saying and we're going to be launching poke next week it's not an offer to buy them it's not like it's like we are going to this is not the acquisition offer this is not the acquisition offer you've been looking for is not and so zuck flies home you know evan i think as the um the story goes i i feel like this might be over dramatized but um the book is the art of war yeah evan gets his whole team a copy of the art of war and they all are sun sues the art of war yes they all read it spiegel's carve out for the week uh yeah yeah that was the guess we were gonna have on and um and they uh watch carefully as poke launches um evan had deleted his facebook account so he goes to bobby and has him check out poke and sure enough it's it's great but the thing that's even

greater is all the buzz that happens for Snapchat by Poke launching yeah and I believe you know Evan then is quoted as saying like this was this is basically like Merry Christmas to Snapchat when Facebook did this because it brought so much attention to the platform like the second word out of everybody's mouth when talking about this huge launch that Facebook was publicizing was Snapchat. Yeah. And a couple of interesting observations here. One, that's a super common thing. I think that a lot of the times I know this actually firsthand.

I made a to-do list manager similar to reminders for the iPhone before reminders launched and when reminders launched we were like oh my god we're dead Apple Sherlocked us and Sherlocking is a reference to Apple back in the day launching an app built into the platform called Sherlock that put all the other search apps out of business I think I have that story right might have been called search oh yeah the app was called sherlock and then apple built spotlight anyway yeah yeah something like that the um but what it did for us as a to-do list was make a lot of people realize they needed a to-do list manager and maybe they didn't like the the generic one that that apple launched same thing with instapaper when apple launched the the what is it, Relator service that's built into OS and Safari.

Yeah, that nobody uses. And sales for Instapaper spiked. So it's kind of an interesting, like, don't be so afraid of the big guy launching your feature. And in this particular case, as is so much evidence, I mean, the reason we're spending so much time on the history and facts here is, like, this is amazing. Like, you couldn't make this stuff up um and it's this is like wonderfully dramatic and like it couldn't have been scripted any better that and we know it all from both court cases and interviews that that evan's given with with media outlets yeah and here's the part that gets me like snapchat is could you could argue it's already today but could at one point be an

existential threat to facebook the reason they got installed on those ipads was because facebook was being blocked and they needed something else and then the reason that they got this huge boost in downloads right before christmas that year was because facebook gave him a gift i mean they launched like snapchat and then made everyone go to this was such a legitimizing moment for snapchat because until then to the extent anybody talked about it it was like oh that's just for sexting right right i remember that and i remember the turning point too where i started realizing okay we'll talk about this in tech trends, but like, okay, my friends are using this for like really telling me the story of their life as it's actually happening without trying

to make themselves look perfect. And this was before Snapchat stories, but I remember getting Snapchats and realizing these are pictures people would never put on Facebook. And yet I'm engaging with these people all day, every day. And none of like, maybe I'm not cool. I don't know. None of them were sexting. Like every single one that I would get from someone is just like, this is like a candid, casual peek into my life. And that I kept trying to tell that narrative. And I was even later, some people were trying to tell me that narrative, but I wanted to make the joke. And I remember trying to tell that narrative to people at work and my family and everyone's like uh it was like taboo to have

it installed on your phone because it was known as the app for sexting yep and you're right it's totally legitimized it totally legitimizing it um so just two short months later february 2013 three huge pivotal pivotal moments for Snapchat. First, they announced that they're now seeing 60 million snaps per day going through the platform. Second, they raised their Series A. They raised $13.5 million from Benchmark at about a $70 million valuation.

And interestingly, there was actually Matt Kohler at Benchmark who first kind of identified Snapchat and started making inroads with them. And then Mitch Lasky ended up leading the deal and joining the board for Benchmark. But Matt had been, well, first he was a very early employee at LinkedIn, but then he was, I think, one of the first five employees at Facebook. And then when he left Facebook to join Benchmark, his first deal that he did was Instagram. And not a terrible track record. Not a terrible track record. So here's this guy, this firm that has, and this group of people that

have such intimate history with facebook and zuckerberg and then facebook's first foray into their next suite in their constellation of mobile apps with instagram now leading the series a in snapchat this like shakespearean drama continues and so then the third event that happens in february of that poor Reggie Brown, the erstwhile third co-founder, suddenly he's moved back home to South Carolina at this point. Again, you can't make this stuff up. And he realizes that Snapchat might be worth a lot of money. And he sues the company and claims that he's due one third ownership stake in Snapchat. Which actually does work out pretty well for him.

I think he was seeking, it ended up getting resolved, it was seeking damages of, I think, like half a billion dollars, and they settled out of court, but I think it was in the hundreds of millions. Rumored to be. Nobody knows. That is one court case that did not leak. Thank you to that court case for happening though because we got this great story to tell much like the same thing with the youtube sequoia memo yeah we're getting all kinds of great stuff

here from the courts um so then you know after that it's kind of like you know inevitable so april 2013 150 million snaps a day june 2013, which is just, what is that? Four months? Four months after they raised their Series A? They raised a Series B of $80 million led by IVP at an $800 million valuation. So literally over 10 times the valuation of the Series A four months later. And I remember at this time, people were not sure this was sustainable. People were like, oh, it it's gonna be a fad and i remember making the argument that the ui was terrible

and what they were doing was commodity and i remember people talking about like are they gonna charge for it are there gonna be ads for it and i remember thinking what they're doing is so simple and easily buildable in a weekend that as soon as somebody clones it and builds one that's free or there's no ads, everyone's just going to move to that. And that like made sense to me at the time that it seemed like they didn't. Young Ben, you were not yet schooled in the power of the network effects. Yep.

Yep. Yep. Boy, it is a mighty moat. Oh boy, is it ever. So that was June, August, yep. Boy, it is a mighty moat. Oh boy, is it ever. So that was June. August of 2013, Facebook is getting desperate at this point. They release a feature in Messenger that allows you to post to Instagram from Messenger. Oh yeah.

Like this is gonna take down Snapchat. September 2013, 350 million snaps per day snapchat announces october 2013 they launched stories which are incredible that we'll get into later game changing totally game changing um and then finally november 2013 uh rumored um but but leaked to many many press outlets including the wall street journal uh mark zuckerberg makes an offer to buy snapchat for three billion dollars but leaked to many, many press outlets, including the Wall Street Journal. Mark Zuckerberg makes an offer to buy Snapchat for $3 billion. He does. And, you know, there's no,

nobody knows exactly where the leak came from there. I think Zuckerberg sort of alleged, and we know this from the Sony email leaks, Zuckerberg alleged that it was a tactic by Evan. You know, Evan throws back that it could have just as easily been Zuckerberg to try and dampen their fundraising efforts rather than bolster them. But anyway, it never really comes to fruition. And all we know is that the offer was made. It didn't, we know the offer was made and we know it didn't happen, but it's pretty, I mean, you both have to put yourself in Mark Zuckerberg's shoes here. Less than a year ago, he flew down to LA and he basically sat there, you know, according to, you know, what, what we've,'s been disclosed uh and what we can

read about he sat there and he told evan you know how to build snapchat and how he would do it and what the right way to do it is and oh by the way facebook was just gonna do it so you know good luck with your little app and then less than a year later he's he's again sitting there offering to pay three billion dollars in cash for this little app. Which is three Instagrams. Keep in mind, WhatsApp hasn't happened yet. So this seems absolutely preposterous. I mean, I'm just sitting there thinking, you know, later on we're going to kind of judge,

like, should they have offered more? Or, you know, what should they have done after, or what should Zuck have done after it was declined? But, you know, it seems crazy yeah and at the time you got to think like okay why does why does facebook need to do this what is facebook's core competency that is the the the mighty moat that they can't have upended and you know that's that's effectively owning your attention because then they get to choose what to do with your attention how much to to use for advertising where to point it in terms of articles or friends how to wait all that but facebook their number one holy grail metric is engagement and how much can

they keep you engaging and hold your attention in a day and snapchat Snapchat is just like the perfect storm of more engaging. Yeah. And that's, you know, well, we'll jump into acquisition category had it happened in a minute. But, you know, fast forward to today in May of 2016. And it's interesting, you know, Snapchat is growing super fast and I'm sure will reach a large number of users at some point. But their DAU, the daily active users that they report is about 100 million now. Which is about a tenth of Facebook. About a tenth of Facebook. And is, I believe, smaller than Twitter.

Well, Twitter's MAU, I think, is like 300, 400 million maybe. It's like 300 and whatever it is, it hasn't grown meaningfully in a while. Yeah. Um, but, but, you know, Ben hit on engagement and that, that is the key here with Snapchat. I mean, so today, um, they're closing with a hundred million daily active users. They're closing in on about a, just about 1 billion snaps every single day. So that's for every active user on the platform. That's 10 snaps per daily active user per day. And 60% of people who use Snapchat daily snap every day themselves. So this totally Snapchat totally blows up the, you know, the old paradigm that, you know, 90% of your users on a social platform you know won't create content

and 10 will and one percent will be super users like 60 are super users yeah like if you think about like a reddit type website or something you're gonna get 90 lurking just just being the consumers nine percent are um are commenting and then one percent are are actually originating the content that creates the the uh the conversation on the site. And, you know, they just completely upended it by making it stupid easy to create. Literally stupid easy. Yeah, like I remember it actually works to their advantage that it still looks like this and it's sort of their brand.

But I remember thinking that it was like kind of hackish and amateurish that the best way that they could think to overlay text over any image was by just like ah screw it we'll make the whole line dark behind there and like ah ship it it just it just felt so crummy to me but like now it's it's become if you see that anywhere you're like oh that's a that's a screenshot at snapchat like they should just do billboards of that because that's their brand at this point yeah well and it's interesting you know i mean this is one of the reasons why we spend so much time on the history a because the story's amazing but b i mean it's clear that evan is an incredibly talented um you know product visionary um it's not like you know snapchat's uh snapchat's look and feel and brand in a lot of ways is as ben as you were saying super janky but like it's intentional right or is it pioneering david i mean they really do all these all these ui paradigms are

like so foreign the first time you use the app and we're having so many people now that they're kind of breaking north of their their their um uh stereotypical age group into into more adult usage um people like being saying i don't know how to use snapchat i need my kids to teach me and you know that's always true with any new technology but putting on my ios developer hat the easiest thing to do when creating an app is to create a table view with a navigation bar at the top and then a little drill down, just like when iPhone OS launched in 2007. And what Snapchat's really done is say like, nope, you open it up and it's in camera mode and then everything is gestural from there. And once you learn it, you get incredibly fast at that. And it's like its own language and grammar. Yep. And, and one of the things, there was a, a great article,

shoot, I can't remember where we'll find it in the, um, and link to it in the show notes that just came out. Um, another one, one of many profiles of Evan and of the company. And, um, one of the things that talks about, you know, it's notoriously been hard to work for Evan. And there's been a lot of employee turnover at Snapchat. But one of the things it says in there is that, like, any discussion of, like, well, we have problem X or we need to do thing Y. And so we should just look at what, you know, other people have done on that. Like, what did Google do? What did Facebook do?

Like, what did Instagram do? Like, that will get you fired like right away like the culture they have and that evan tries to cultivate there is like i don't care what other people have done in the past like we're doing things our way here um which i think you i mean you really gotta admire it like it's what's it's what's gotten snapchat to where it is yeah and this is i'm gonna i'm gonna pull forward my um tech trends but uh there's some interesting things there because they're doing a lot of things mobile first in a way that I wouldn't have known the current users or the current products weren't doing mobile first. One of their big sells, and we'll talk about their

revenue model right now, is vertical video advertising. And for the first time, they're forcing content creation to appear in the way that is the most immersive on your phone. And I think if they're looking at others, they say, okay, well, how do people do ad units? Oh, it's a feed or, oh, they repurpose, you know, letterboxed video, or they make people turn it sideways. And that wouldn't be as engaging. I mean, it's a harder path to go this way, but it's, you know, I think it's fair to say product visionary that everything is completely rethought in this absolute mobile first way. They also have basically, I mean, they changed the way that they do user growth and adding your friends with snap codes.

I mean, that is the first time I've seen QR codes used effectively in the wild. And I think that, you know, if you go get a Facebook product manager or you go and get, you know, someone who's worked at, at LinkedIn or Google, you ask like, Oh, how should we do like an invite system? And if it, and an adding friends system, there's like a templated way to know how to do that. And this is so different. It's like, what do you mean if they're probably right next to each other? So it will be, will it be easy to just show the screen to the other screen yeah okay cool snap code accomplished or what interestingly that was an acquisition they acquired the technology behind the qr code oh nice well i guess good on them for for you know

seeing the opportunity to to do something new and novel there rather than re-implementing the playbook. But it's a really good point, Ben. And I think that's something that you could almost say is like a dirty little secret of Silicon Valley. Like there's actually not that much innovation that happens. It's really rare. I mean, I was- Yeah, somebody in the Facebook or the PayPal mafia figures it out once and then everyone does it afterwards.

And then that playbook gets disseminated to everybody. And like, it's really hard. I mean, i was emailing with the founder i work with today and we're facing a problem and i was like oh well we should uh let's look at how you know stripe dealt with this because like they dealt with this problem so we should probably like do what they did you know and like it's really dangerous thinking um but it's also difficult to know and it's difficult to know how to do what's right when, when you're doing something new, um, and how much to take from the playbook because it is the right thing and how much to be the innovator. Yeah.

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solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes our huge thanks to huntress okay so i think for the structure of the show what we'll do now is we'll we'll dive into category what would have happened otherwise we can talk through a little bit um and we'll kind of wait all the way till we get to render conclusion to talk about their current business. Does that sound good to you? Sounds good to me. All right, sweet.

So acquisition category, I was torn on this. And here's how I'll frame it. If they had actually gotten the acquisition done when they did, it would have been, or when they made the offer, that would have been a product acquisition. They were buying one single product that people all over the place were using in the exact same way. At this point, it would be a business line. It is many products rolled into one.

I mean, they've got Stories and Discover and the traditional Snapchat model. And they have several different ad units that they sell in there. And those are all different products for advertisers and i think that at this point is it would be like the snapchat business unit of facebook rather than hey we bought this one-off app it has a lot of people using it like whatsapp it would truly be like they would need their own ad sales team they would need a lot of things that wouldn't be able to be factored into Facebook. Yep, I think that's right. The only counterpoint I'd offer

is maybe this would be, had this actually happened and had Facebook done its thing and just left it alone and all of the growth and innovation that's happened at Snapchat had also happened, I think you'd almost argue that this would be a new category, which would be like a wholly independent company within another company. Um, yeah.

And then, okay. So because it's, because it's all of it, right? Like it's the people, it's the technology, it's the product, it's the, like the way the business operates. All of these things are just wholly different from Facebook. Yeah. like the way the business operates all of these things are just wholly different from facebook yeah and this is um in a way that instagram and whatsapp really aren't yeah so let's play that out so now we're into what would have happened otherwise um if the acquisition had gone through this is pre-revenue for snapchat yep does facebook kind of have their way with it and start gathering more information about the snapchat user or even better yet they probably find a way to just tie those together

on the phone where they say oh this person's logged in as facebook here they ask you to log in as facebook with facebook once in the snapchat app so they can tie it together much like with Instagram then an advertiser can target you in multiple ways and can say you know I'm going to use the same ad dashboard I get the same targeting capabilities and I'm going to target this Snapchat user as if they were any other Facebook user but I want to reach them when they're having this aha moment instead of when they're in the Facebook app, you know, reading about X, Y, Z. I think that's absolutely would have happened because they would have used that common ad platform and continue to leverage it and make it even easier for advertisers to advertise

on multiple mediums. And that is very different than the ad strategy that Snapchat is doing now. Yeah, this is what makes this, well, listeners are the judge of whether this is interesting or not. But to me, what makes this so interesting is since the spurned acquisition offer, Snapchat has really totally gone off and become the anti-Facebook. And that goes not just through the product and the consumer-facing aspects of it not just through the product, um, and the consumer facing aspects of it, but through the whole advertising platform as well. Um,

I mean, Evan talks about and promises that they will never do creepy targeting. You know, there is, uh, that is Snapchat is a brand advertising platform and they will not track users. They will not collect data. Privacy is core to what Snapchat is. And that's just anathema to the Facebook and drill downs like I can use on a Facebook ad dashboard. reporting on how many people opened your your um your snap and then you get to choose if you

appear in a live story or what discover channel you appear on so you basically get live story program discover channel location and or gender and then you get number of people who opened it's pretty primitive so if i'm trying to do any conversion-based advertising, that's right out. It's extremely expensive and I can't quantify it. And I don't know if I'm actually reaching my core customers. But if I'm Coca-Cola, that sounds like a killer brand advertising platform. I can make sure people see it. They're like in this moment of discovery when they're looking for it. It's fully immersive on their screen you know i design and i can target based on content right that's the other thing so that you you have contextual and location yeah contextual targeting location is like getting a little bit into the the um

you know it would be more interesting to me from a conversion perspective but also interesting from a yeah but i mean things like uh like i think about you know Snapchat, like one of the places where it's really flourished is Coachella and places like that. Right. So like I can target people who are at Coachella. Right, right. And the big obvious thing here is there's no links on Snapchat, so I'm never leaving the platform. It's not like they could link me out to go buy a product anyway. It's purely one directional television style advertising. Yeah. And this is like, this is the kind of stuff,

like let's say I'm, you know, Coca-Cola again. You know, if I'm advertising on Facebook, I'm just blasting. I can target super granularly in the heck out of people, but like,

they're probably not that interested in drinking a Coke while they're on Facebook. But like, if I target people who are at coachella like and it's hot out you know maybe they want to drink a coke you know or or when i target based on that's location which is secondary here but but content wise so like all the discover channel you know uh you know espn or taste made you know um i want to advertise to people who are interested in cooking i'm uh you know i'm um you know, ESPN or taste made, you know, um, I want to advertise to people who are interested in cooking. I'm a, you know, I'm, um, you know, Betty Crocker or whatever. Like I could advertise on Facebook to people who list cooking as one of their preferences, but they're not cooking when

they're on Facebook. But when they're watching taste made and watching cooking shows, then I can, then they're in the mode for, I don't know if the context is better like i look at it like you're not the nature of brand advertising is that you're not going to go and like transact on that and close the loop at anywhere near that moment it's that it's like stored in your head and um i think that the context doesn't matter, but the richness of the ad does. You don't think there are psychological associations between content and advertising? Oh, I do. I just don't think that seeing an ad on Facebook is contextually worse than seeing it on Snapchat.

I'm already in entertainment mode. I could see that if you're advertising to me when I'm on a Google search and I'm on a quest for information and I'm like, Coca-Cola, get out of here right now. But on Facebook, I'm open to being entertained. Anyway, I guess the point I'm making is I think the context of Snapchat isn't necessarily any better. But since they're doing brand ads and you have the opportunity to create a much more rich advertisement, that it makes it a more valuable brand platform because you don't actually care about that granular of targeting. Fair enough. I still think when I'm on ESPN and Discover and I get Axe body spray,

I would never wear Axe body spray, so I claim on the internet. But I don't know. I like to the extent you could make an argument that television is still very valuable. It's like this is the argument. Which you absolutely can. So here's here's we're getting into my render conclusion, but I think Snapchat's opportunity is enormous because brand advertising currently is and has always been much larger than transaction-based advertising. I'm not sure, conversion-based advertising? I don't know. Direct response.

Direct response. Yeah, there you go. And advertising stays relatively fixed as a percentage of the GDP. It's between 1% and 1.4% of the GDP ever since the notion of advertising was invented in the United States. But with that staying, you know, about fixed, it's about allocation. And if brand advertising is and sort of will always be more significant than direct response, right now, a lot more brand dollars are spent on television still than anywhere else. And now it's a race to what platform can effectively steal from television advertising. And that's where I think Snapchat's real opportunity is. Can they be, you know, the television of the future? There's no good place really to do it online right now. I mean, we did a past show on YouTube. You know, YouTube's kind of the best place

to do brand advertising online right now. And it's still got a bunch of problems and people skip ads and all that stuff, you know. Whereas, you know, yes, you can skip ads on Snapchat, but like just the whole modality of the product is so much more immersive. And so are the ads. They're 10 seconds and you kind of want to skip them less. Like I want to skip an ad when I'm watching Discover as much as I want to skip one of my friend's stories that I'm not interested in. Basically, like I've got 10 seconds. If you can captivate me, I'm good for 10 seconds. Whereas on YouTube, like running a pre-roll for a minute where I have to wait five seconds,

I'm just going to skip after five seconds every single time I possibly can, because it's not designed to be watched all the way through for the impatient person. And especially not on mobile, especially not on mobile. Great point. And Snapchat is like totally piggybacking, now we're in tech trends, but totally piggybacking on our completely, you know, our culture that is not able to pay attention to things for very long. And we end up watching,

I was talking to someone else today, watching a snap for 10 seconds, watching another snap for 10 seconds, and maybe like 10 minutes go by. And you end up completely immersed in something where you could have watched a whole television show in there, but it was cut up in small enough content where I was continually entertained. And again, back to like, even Instagram, and you know, as our listeners know, we're big fans of Instagram, but like like you got to scroll through the damn feed. You do. You do.

And God, as a as a completionist, it kills me that it snaps to the top every time. So I have this like fear of opening Instagram now, because what if I get partway down and then there's some pictures that I missed? Like Snapchat doesn't have that because everything in it, the understanding is like it's sort of unimportant and it'll go away anyway. So I can just check it at my leisure. And literally you just open the app and maybe you like, you know, you open the app, you swipe left, you tap. And now with stories auto playing to the next story, that's all you got to do. Yeah. I think their

average time viewed an app right now is like 30 minutes. I mean, they command a tremendous amount of attention. 30 minutes with two taps and one swipe. Yeah. I mean, it's the attention war. I mean, that's what this really comes down to from between Facebook and Snapchat. And I was actually, this is another great conversation I was having earlier this week. Instagram redesigned. And boy, is it gorgeous.

It just shows off just the content. We won't talk about the icon, but inside it is like so nice. You're not digging the pink? No. But somebody raised a great point to me that the world sort of shifted and now Instagram is a museum. Instagram inherently, I put less content on it because it's like a showcase and it reflects on me forever. And when you go to Snapchat, my response was, well, Snapchat's like a crowded bar. Like there's content flying everywhere. It's loose. It's fun.

And that just creates a platform that is just commanding of way, way more attention than that museum feel. How much relative time do you spend in museums versus bars? Yeah, well, I might be non-representative, but maybe not. Maybe not. Anyway, all right. Let's start driving this towards home. Okay, tech trends. You know, I think we touched on all mine. Yeah, mostly mine too, but I'll just call it out again. We've talked about this on the show. I think it's maybe been one of my tech trends in the past,

but a perfect example of start small. They started with nothing, but start small, nail it for one audience and grow from there. They didn't even do this intentionally, but the use case of I want to text with my friends and Facebook is blocked on my iPad, like solve that, then solve the next thing. Classic case. Yep, yep, yep. next order of magnitude of customers and don't focus on the far future because contrary to what you might think in startups you can implement a hill climbing algorithm and there are not local

maxima so don't be afraid that you're going to hit a false peak just keep hitting the next peak and you'll be especially especially in consumer facing yes companies yes yeah i guess it's probably not the same in enterprise, but. Yeah. And I'm not sure I totally agree with that premise, but I sure like it from a inspirational perspective. All right. Conclusion.

So normally we would throw out like, was it a good decision to make this acquisition? And so I was thinking for this one, you know, was it a good idea if you're a Snapchat shareholder to, you know, was it a good idea if you're a Snapchat shareholder to, you know, decline this offer? And David has a more interesting framework, I think, because that one's just a sure thing, right? It's like, oh, I'm a Snapchat shareholder. Do I want to be worth $3 billion or the $16 billion it is valued on paper today and will likely continue to grow? So David, what's your framework? So I thought we could do uh grade mark zuckerberg and facebook for the decision to walk away after the three billion dollars versus trying harder to make

the acquisition happen likely at a higher price yeah and this one's interesting because i think it presents a little bit more than just like obvious shareholder value. It gets into, you know, the more you're sending offers back and forth, the more likely to leak. The more you worry about your team back at Facebook, like we saw with the WhatsApp acquisition being like, wait, $19 billion we paid for what? And then sort of having to justify that. There might be like a personal pride thing on the line there at the end of the day like i'm as i'm talking through all this i think none of it really matters that much and it was still facebook needed to offer more like it was i give facebook an f on not going and bidding higher i think this one is like so clear-cut at this point.

I would love to hear your thoughts, though. Yeah, I've been thinking about this. I actually, I'm going to be, our listeners are going to love this. I'm going to be divisive here. I'm going to give them an A. And the reason I'm going to give them an A is because especially with the direction divisive here i'm gonna give them an a and the reason i'm gonna give them an a lay it on me is

because especially with the direction that snapchat has gone i was thinking about this when we were talking about the category and i was like oh it could be like a company within facebook like never would work like these are just two companies that cannot exist together um and so if i'm mark zuckerberg and I'm Facebook, this crystallized when you were talking about like the reaction within the company of Facebook, like, okay, let's say he had bid Snapchat up to, I don't know, $15 billion or $19 billion WhatsApp territory. And then come back in and then this guy, Evan, would come into the company and basically be like, you know, F you, everybody. Like, I do things completely differently here.

I stand for everything that you are not, you know. What would that have done, right? And like Facebook has been super successful in the two and a half years since this time. And I think in a lot of ways really crystallize what Facebook is and what their growth potential is going forward. And they're now what, like a 300-ish billion dollar market cap company? I don't know. Yeah, I was thinking about digging in here, but I'm trying to think through if Facebook did what I was talking about earlier and kind of like flattened it onto the same platform and made it easy for advertisers like Instagram. If, to your point, what if they bid it up to $15 billion? Would they in any reasonable time period have gotten $15 billion of advertising revenue out of it or would there just have been this implosion

beforehand like you say of like culture mismatch uh a lot of the um value that people are attributing to snapchat right now is because it's on this unique and different trajectory that's more like television advertising than direct response and could that have existed within facebook right that's that's a really interesting if you logged in, what would Snapchat be like if you logged in with Facebook? That'd be weird. Yeah. Yeah. I mean, they're projected to earn about $300 million of revenue this year.

So, I mean, their valuation is not based on their current revenues at all. It's based on the promise of the future that it can replace television brand advertising. Yep. And I don't know what I would change my grade to, but I totally, totally see your argument that if Facebook continued to bid this up, they may actually not be able to get that much value of it internally or as much as they can do as an external company and that's why we need new startups to come and create value that incumbents never could create yeah i mean this seems like a classic case of you know we saw it with poke

like they recreated it you know pixel for, and it just doesn't work inside Facebook. No. I mean, yeah, there was the network effect mode too, but like, it was still so small at that point. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yeah, Vanta is

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