… Matt Yglesias in Slate. Now I should preface that I generally like Yglesias’s writings which is why I read them but today something happened.
The Wall Street Journal reported today that Snapchat turned down a $3 billion acquisition offer from Facebook.
I say three cheers to Snapchat!
The company’s founders and investors may or may not be making a terrible mistake. But from the sidelines, I think one should almost always root against the acquisition exit. It’s boring. It’s lame. The bet when you turn down $3 billion is that there’s some chance that in the future your company will be worth $30 billion or $300 billion and you want to reach for those stars and dare to dream. …
Will Snapchat develop a revenue stream? Will it find more plausible use-cases for its service that let it continue to grow? I don’t know. Probably not. Most business ventures fail. But good for them for trying. The founders are smart and young and if it doesn’t work out they’ll do something else.
Wow just wow. Where to begin? Let’s try and understand Yglesias’s position. Snapchat — a company with no revenues that currently targets young people — apparently got an offer from Facebook for $3 billion that does have a revenue stream but is worried about losing young people. Now, $3 billion is alot of money. For instance, it is twice what Google bought YouTube for. Moreover, there are only a handful of start-ups that actually make it to a billion dollars in valuation, let alone an exit. Snapchat also faces competition and, put simply, it wouldn’t be hard for others to replicate their function of deleting photos. Indeed, Apple made it easier for such development in iOS 7.
But Yglesias is cheering for the rejection of that offer. First, he thought that would be boring and lame. These have carry the formal definition of “not providing fodder for journalists to write about in the future.” I guess that is true but why one should ask entrepreneurs to think of the journalists when making commercialisation decisions is anyone’s guess. Second, he thought that they were taking a bad bet. The bet is apparently that you give up $3 billion in the hope of earning more. Yglesias thinks they have a chance at $300 billion; you know, AT&T in its heyday numbers. I think we can dismiss that as sheer innumeracy. But let’s imagine $30 billion is a possibility. How much of a possibility does it have to be?
OK to “The Algebra” app:
$3,000,000,000 < p*$30,000,000,000
implies p > 1/10.
So to believe that is a good bet, Snapchat has to have a 10% chance of becoming a $30 billion company — somewhere higher valuation than Twitter and lower than Facebook (its would be suitor). Did I mention that it has no revenue, no revenue plans and a young customer base that don’t like things like expenditure for digital services? If you look at the last decade of billion dollar companies and condition on Snapchat being one, they don’t have a 10 percent chance of a fraction of that.
Finally, Yglesias says that the founders will be fine. So they try and fail, they’ll do something else. Yeah sure. But throwing away $3 billion isn’t failure, it is deciding not to succeed. That is a different proposition. What are they going to learn? I guess we shouldn’t through away more than our business is worth again?
Ultimately, while it is easy to pull apart these arguments, the actual real history of entrepreneurial firms tells us that most of them succeed by cooperating with established firms rather than competing with them as Yglesias is cheering here. As a person responsible for much of that research (see here, here, here and here to name but a few), let me tell you that the struggle in getting acquired is getting a big payout from stronger incumbents; something Snapchat, like Groupon before them, seem to have overcome. To be sure, there are companies like Google and Dropbox (who each turned down a small amount), that end up doing quite well. But they are the exceptions rather than the rule. Snapchat may prove me wrong but I have to say, kids, you should have taken the money.