Why I turned down Facebook's $3 billion offer: Snapchat CEO

January 7, 2014, 10:48 am J.J. Colao, Forbes.com Yahoo7

On paper, Mark Zuckerberg's terms were so generous that they seemed preposterous. Why did Evan Spiegel say no?

Snapchat CEO Evan Spiegel. Photo: AP

Thirteen months ago Facebook’s Mark Zuckerberg, the richest twentysomething in history, reached out to Snapchat’s Evan Spiegel, who oversees a revenue-less app that makes photos disappear, with an invitation, delivered to his personal e-mail account: Come to Menlo Park and let’s get to know each other. Spiegel, now 23 and the brashest tech wunderkind since, well, Zuckerberg, complete with his own legal battle against a college buddy who helped him start his company, responded to his role model thusly: I’m happy to meet you... if you come to me.

See Evan Spiegel's email to Mark Zuckerberg

The press hasn't been kind to the Snapchat CEO: he's been portrayed as a brute who screwed over a former friend to found the company, and one profile paints him as a stuck-up brat. But is he really that arrogant? He showed Business Insider the email he sent to Zuckerberg. Read it here.

And so, armed with the premise of meeting with architect Frank Gehry about designs for Facebook’s headquarters, Zuckerberg flew to Spiegel’s hometown, Los Angeles, arranging for a private apartment to host the secret sit-down. When Spiegel showed up with his cofounder Bobby Murphy, who serves as Snapchat’s chief technology officer, Zuckerberg had a specific agenda ready. He tried to draw out the partners’ vision for Snapchat – and he described Facebook’s new product, Poke, a mobile app for sharing photos and making them disappear. It would debut in a matter of days. And in case there was any nuance missed, Zuckerberg would soon change the large sign outside its Silicon Valley campus from its iconic thumbs-up “like” symbol to the Poke icon. Remembers Spiegel: “It was basically like, ‘We’re going to crush you.’”

Spiegel and Murphy immediately returned to their office and ordered a book for each of their six employees: Sun Tzu’s The Art of War.

Related: Snapchat finds its niche with disappearing messages

Snapchat represents the greatest existential threat yet to the Facebook juggernaut. Today’s teens have finally learned the lesson their older siblings failed to grasp: What you post on social media – the good, the bad, the inappropriate – stays there forever. And so they’ve been signing up for Snapchat, with its Mission: Impossible style detonation technology, in droves. FORBES estimates that 50 million people currently use Snapchat. Median age: 18. Facebook, meanwhile, has admittedly has seen a decline among teenagers. Its average user is closer to 40.

Zuckerberg understood this, which might explain the gamesmanship. When Poke debuted, on December 21, 2012, Zuckerberg e-mailed Spiegel, telling him that he hoped he enjoyed it. Spiegel, who had deactivated his Facebook account, frantically called Murphy for his review. It was, Murphy responded glumly, a near-exact copy.

But a funny thing happened on the way to obsolescence. The day after its launch Poke hit number one on the iPhone app store. But within three days, on December 25, Snapchat had pulled ahead, boosted by the publicity, as the Facebook app disappeared from the top 30. Laughs Spiegel: “It was like, ‘Merry Christmas, Snapchat!’”

Related: Bored teens, 'Facebook is dead' and the Mom Problem

Which helps explain what happened in the fall when Zuckerberg reengaged Spiegel, basically ready to surrender on terms so generous, on paper, they seemed preposterous: US$3 billion in cash, according to people familiar with the offer, for a two-year-old app with no revenue and no timetable for revenue. (Facebook refused to comment for this article.)

Even more preposterous, of course: Spiegel turned Zuck down. It was the most scrutinised business decision of the past year, complete with head-spinning math. FORBES estimates that Spiegel and Murphy each still owned about 25% of Snapchat at the time, which means they were both forgoing a US$750 million windfall. “I can see why it’s strategically valuable,” one leading venture capitalist tells FORBES. “But is it worth US$3 billion? Not in any universe I’m aware of.”

Related: Snapchat suffers security breach

The roots of that decision, however, were obvious to anyone who knew about the primer that Spiegel and Murphy had bought for their team. Chapter 6 in The Art of War specifically addresses the need to attack an enemy where and when he displays weakness. Spiegel and Murphy sense an opening and insist that rather than selling, they’re aiming to upend the social media hierarchy, armed with a US$50 million war chest raised in December at a lower (but still heady) valuation of just under US$2 billion. “There are very few people in the world who get to build a business like this,” says Spiegel. “I think trading that for some short-term gain isn’t very interesting.”

For those keeping score, a “short-term gain” for a 23-year-old who still lives in his dad’s house now apparently equals three-quarters of a billion dollars. In going for the long gain, Spiegel will either become the next great billionaire prodigy or the ultimate cautionary tale of youthful hubris.

Read more on Forbes.com: The inside story of Snapchat

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