Episode 12: Snapchat

[0] I've noticed our episodes have been getting a little longer.

[1] Yeah, they have.

[2] Do you think that's a problem?

[3] Maybe a little.

[4] Who got the truth?

[5] Is it you?

[6] Is it you?

[7] Is it you?

[8] Is it you?

[9] Is it you?

[10] Sit me down.

[11] Say it straight.

[12] Another story.

[13] Welcome to episode 12 of Acquired, the podcast where we talk about technology acquisitions that actually went well.

[14] I'm Ben Gilbert.

[15] I'm David Rosenthal.

[16] And we are your hosts.

[17] This episode, we're going to try and do something a little bit different.

[18] Today we're going to talk about one that didn't happen at all.

[19] Dun, dun, done.

[20] This week we're going to cover Facebook's attempted acquisition of Snapchat for $3 billion a while back.

[21] In November of 2013.

[22] 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.

[23] Well, we know for a fact what would have happened otherwise if Facebook didn't acquire Snapchat because they didn't.

[24] All right, a few things before we get into it.

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[46] Okay, listeners, now is a great time to thank one of our big partners here at Acquired, ServiceNow.

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[63] Thanks, ServiceNow.

[64] All right, time to get into it.

[65] All right.

[66] Well, we tried to get guests for today, but both Zuckerberg and Spiegel were booked up, unfortunately.

[67] Yeah, or so we assumed.

[68] All right.

[69] I'm going to dive in with acquisition history and facts.

[70] I'm going to, this might take a little longer because this is a long story here.

[71] David, do not scare them away.

[72] All right.

[73] 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, freshman year.

[74] And across the hall, a guy named Bobby Murphy, who's a senior, is living there.

[75] And so they start hanging out.

[76] They become friends.

[77] And Murphy recruits Evan, Bobby recruits Evan to work on a social app that he had an idea for inspired by Google Plus.

[78] What?

[79] Unsurprisingly, that goes nowhere.

[80] Time goes on.

[81] And Evan, Evan, Kevin's still at Stanford, and he's actually, he's doing great at Stanford.

[82] So he's an undergrad, and he ends up majoring in product design, and David Kelly becomes his advisor.

[83] David Kelly's the founder of the D school.

[84] Yeah, founder of the D school at Stanford and professor there, and founded IDEO before that.

[85] And the D school, I've 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.

[86] deschool classes.

[87] But somehow Evan manages to get David to be his advisor.

[88] And that's not the only cool thing he does as an undergrad.

[89] 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.

[90] It was awesome.

[91] It was taught by Peter Wendell, who was one of the founders of Sierra Ventures and was a long -time venture capitalist and then co -taught by Eric Schmidt and Raymond Nazir, who was Google's first head of communications and worked for Eric both at Novell before Google and at Eric.

[92] And it was an amazing class.

[93] We had amazing guest speakers come.

[94] People like Meg Whitman, like Biz Stone, like Peter Fenton, Scott Cook.

[95] 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 it into it.

[96] Wow.

[97] So no doubt a special individual, even before Snapchat.

[98] Even this was years before Snapchat, you could tell this kid had talent.

[99] He was going places.

[100] So that summer, after Evan's sophomore year.

[101] He and Bobby team up again.

[102] They start a new company.

[103] This time, it's a website for aspiring college.

[104] High schoolers navigating the college admissions process.

[105] It's called Future Freshman.

[106] Why does this story feel super familiar?

[107] 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.

[108] something about somebody believing it was actually their idea laying clean.

[109] Yeah, was there, there were some twins who...

[110] Yeah, they might have used a super similar law firm to the one here.

[111] I'm jumping ahead, but...

[112] Obviously referring to the social network here in Facebook, the similarities are eerie.

[113] Okay, so the future freshmen, that goes nowhere.

[114] Again, April 2011, so it's Evans Jr. Year.

[115] and Murphy, Bobby's graduated and Evan's hanging out one day and his fraternity brother, also in Kappa Sigma, Reggie Brown, who is a classmate of Evans and a close friend, he comes running up to Evan and he's like, I've got an idea for an app.

[116] Uh -oh.

[117] Uh -oh.

[118] And he's like, I sent this picture to this girl last night, apparently.

[119] this is all, as we will discuss in a minute, this is all discussed in the courts and legal filings.

[120] And I got this idea for an app that you can make pictures disappear.

[121] And supposedly, Evan gets really excited and repeatedly calls it a, quote, million dollar idea.

[122] One million dollars.

[123] Which he denies, I believe, in the court proceedings that he ever said anything about the million, but did acknowledge he was very excited.

[124] Yes.

[125] So they get really excited, the two of them, Reggie and Evan.

[126] they recruit Bobby again 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 decided to call it peekaboo um they submit it as their project for the class as Evans 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.

[127] And so, you know, they work really hard during the semester, during the quarter, and they get the app.

[128] You get a prototype done.

[129] It's actually, at this point, it's a website.

[130] It's not even on a phone.

[131] You have to submit a photo on a website.

[132] Right.

[133] You have to, like, click the choose file button on your computer.

[134] I mean, that's a mess.

[135] It was janky.

[136] And it goes over like a lead balloon.

[137] The app of esteemed VC judges hates it.

[138] Apparently, according to an interview with Evan, one of them suggests maybe they should talk to Best Buy about a partnership.

[139] I don't know what that would be.

[140] Maybe with like cameras or something.

[141] So not an auspicious start to the earth.

[142] early days of Snapchat.

[143] But undaunted, they decide to keep working on it.

[144] So they spend the whole summer after that quarter working on the app.

[145] And they work really hard and they grow the app.

[146] And by the end of the summer, they have 127 users.

[147] Which having worked on a couple of consumer things that 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.

[148] And you're like, I need three to four more orders of magnitude before this is anything meaningful.

[149] Yeah.

[150] And it's like, it's almost inspirational that they only had 127 users.

[151] We're on all summer.

[152] So we're now roughly six months into the life of what would become Snapchat.

[153] They have 127 users.

[154] 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.

[155] Then the summer ends.

[156] And that argument came right around the time or part of the same discussion is when they're figuring out their equity splits, right?

[157] Yeah, I think it was prompted by figuring out the equity splits.

[158] Which, boy, is that a lesson for founders out there to have that thing early before people start to feel like they're, they've already, you know, contributed and earned more than the rest of the group thinks.

[159] 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.

[160] Yeah.

[161] Have that discussion early.

[162] Yeah, we would recommend having.

[163] Pro tip, have the equity discussionarily.

[164] So the app's still going nowhere.

[165] The summer ends.

[166] Evan heads back to Stanford for his senior year.

[167] Bobby's like, hey, I need a job.

[168] So he takes a job at another startup in San Francisco.

[169] That blows my mind.

[170] Like, they left the app in the store.

[171] They literally put it on ice.

[172] And around the same time, more bad news.

[173] 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.

[174] So Snapchat, or peekaboo is on the ropes at this point.

[175] You know, they need to change the name.

[176] They come up, they brainstorm them.

[177] They come up with Snapchat.

[178] And they kept the ghost.

[179] I'm pretty sure Brown actually came up with the...

[180] 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 on on Evan Spiegel, that there's a lot of our source material here.

[181] Evan's mom tells her niece, who's in high school in Orange County.

[182] So this is Evan's cousin, who's a high school in Orange County, about this app that Evan's working on, and her niece downloads it and thinks it's really cool and starts using it with her friends in high school.

[183] And one of the reasons that they start using it is that you don't need to use it on a phone.

[184] you can use it on an iPad because you know works works on iPads too and and with the iPads that their school their you know Tony private school in Orange County had given them they had them locked down so you couldn't like you know text you know use i message yeah i think i read something they they also made it so you couldn't install Facebook yeah 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 random cousins app so that they could text each other during the day with their school iPads in an Orange County.

[185] Wow.

[186] So it sweeps through this school.

[187] Then it starts sweeping through other high schools in Orange County.

[188] Then it moves up the state and then it moves into other high schools in Northern California and in Silicon Valley.

[189] And the growth takes off.

[190] So by December of 2011, Snapchat is up to just over 2 ,000 users.

[191] The next month, January, 20 ,000 users.

[192] A couple months later in April, 100 ,000 users.

[193] So there's an order of magnitude growth in a month and then another 5X the next month?

[194] In the next two to three months after that.

[195] And this is the proverbial hockey stick.

[196] They have found it.

[197] So all of a sudden, they need to pay the server cost because they're hosting a lot.

[198] lot of photos at this point.

[199] 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 hockey stick, but this was truly like the product was stagnant, and it was like, it literally didn't change anything.

[200] Finding the right market, and it's not like they even found it.

[201] It's like it finally insidious and found its way to the next.

[202] It found the right market for them.

[203] Wow.

[204] 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 it's almost like chasing a true chasing a unicorn to try and to try and duplicate this sort of success good uh good choice of words um so at this point you know they're now it's now april they're at 100 000 users um they're they're they're i don't know if they're using a w s or snapchat now uses google computer engine um if they're using that at that point but they they got to start paying the server bills yeah they're like by far the largest tenant, I think.

[205] Yep, on GCE, yep, um, today.

[206] Uh, so they raise a seed round, $485 ,000 from Lightspeed at a, uh, four and a quarter million dollar valuation.

[207] I think that was the pre money.

[208] Um, so, but effectively light speed gets about 10 % of the company for less than $500 ,000.

[209] And at which point, uh, Evan is furiously refreshing his, his, uh, Wells Fargo app, I think in class as the story goes.

[210] 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.

[211] Yeah.

[212] It's April.

[213] Graduation is in, like, May, June.

[214] Yeah, he literally drops the mic in the middle of class.

[215] This is according to Evan.

[216] Once the money hits the bank account and walks out the door and never comes back.

[217] Yeah.

[218] And if you were in that class, we would love you to join the Slack.

[219] team and let us know how it really went down.

[220] But that's what we're going off of.

[221] That's what we're going off of.

[222] And so walks out, moves down to L .A., convinces Bobby to come down.

[223] 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.

[224] And then for basically the rest of 2012, that's when the core of Snapchat, as we know it today, gets built.

[225] So they shack up in LA, work for the whole summer.

[226] In October, they launch on Android.

[227] And when they launch on Android, they announce that they are now serving 20 million snaps per day in October of 2012.

[228] December of 2012, they add the next big pillar of Snapchat, which is video.

[229] And then also in December of 2012, Mark Zuckerberg has heard.

[230] about this app, and he sends an email to Evan Spiegel.

[231] He has, and it does seem that he had heard of it a little bit earlier since kind of quietly, I don't know said Microsoft, Facebook had been working on an app called Poke.

[232] 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 a ux perspective a very excellent clone of snapchat and when zuck does does meet with evan it's kind of an interesting story of how he gets there um zuck says hey want 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 want 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.

[233] But Zuck walks in with a plan, and he basically says, hey, here's how I would do Snapchat and sort of how I see your role in the world and how I could see this all playing out.

[234] And it's this grandiose vision and it's quite impressive.

[235] And he ends with saying, and we're going to be launching POKE next week.

[236] It's not an offer to buy them.

[237] It's not like, it's like we are going to crush you.

[238] This is not the acquisition offer.

[239] Yeah.

[240] 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 feel like this might be over dramatized but um the book is the art of war yeah and 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 a couple of cover out for the week uh yeah yeah that was the guess we were going to have on and um and and they watch carefully as Polk launches.

[241] Evan had deleted his Facebook account, so he goes to Bobby and has him check out Polk, and sure enough, it's great.

[242] But the thing that's even greater is all the buzz that happens for Snapchat by poke launching.

[243] Yeah, and I believe Evan then is quoted as saying, like, this is basically like Merry Christmas to Snapchat when Facebook did this, because it brought so much attention to the platform.

[244] like the second word out of everybody's mouth when talking about this huge launch that Facebook was publicizing was Snapchat.

[245] Yeah.

[246] And a couple interesting observations here.

[247] One, that's a super common thing.

[248] 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.

[249] And when reminders launched, we were like, oh, my God, we're dead.

[250] Apple Sherlocked us.

[251] 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.

[252] I think I have that story, right?

[253] It might have been called cert.

[254] Ah, yeah, the app was called Sherlock and then Apple built Spotlight.

[255] Anyway.

[256] Ah, yeah, yeah.

[257] Something like that.

[258] The, 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 generic one that Apple launched.

[259] Same thing with Instapaper.

[260] when Apple launched the, what is it, Relator service that's built into OS and Safari and sales for InstaPaper spiked.

[261] So it's kind of an interesting, like, don't be so afraid of the big guy launching your feature.

[262] 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.

[263] Like, you couldn't make this stuff up.

[264] And it's, this is like wonderfully dramatic.

[265] And like, it couldn't have been scripted better that and we know it all from both court cases and interviews that that evans given 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 them a gift.

[266] I mean, they launched like Snapchat and then made everyone go to...

[267] Well, and 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.

[268] Right, right.

[269] I remember that.

[270] And I remember the turning point, too, where I started to realizing, okay, we'll talk about this in tech trends, but like, okay, my friends are using this for, like, like really telling me the story of their life as it's actually happening without trying to make themselves look perfect.

[271] And this was before Snapchat stories, but I remember getting Snapchats and realizing these pictures people would never put on Facebook and yet I'm engaging with these people all day every day.

[272] And none of, like maybe I'm not cool.

[273] I don't know.

[274] None of them were sexting.

[275] Like every single one that I would get from someone is just like, this is like a candid, casual peek into my life.

[276] And that, I kept trying to tell that narrative.

[277] And I was even later, some people were trying to tell me that narrative, but I wanted to make the joke.

[278] 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.

[279] Yep.

[280] And you're right.

[281] It's totally legitimized it.

[282] Totally legitimizing it.

[283] Um, so just two short months later, February 2013, three huge pivotal moments for Snapchat.

[284] First, they announced that they're now seeing 60 million snaps per day going through the platform.

[285] Second, they raised their Series A. They raise $13 .5 million from benchmark at about a $70 million evaluation.

[286] And interestingly, there was actually Matt Kohler at Benchmark, who first kind of identified Snapchat and started making inroads with them.

[287] And then Mitch Lasky ended up leading the deal and joining the board for Benchmark.

[288] But Matt had been, well, first he was very early employee at LinkedIn.

[289] But then he was a, I think one of the first five employees at Facebook.

[290] And then when he left Facebook to join Benchmark, his first deal that he did was Instagram.

[291] And not a terrible track record.

[292] Not a terrible track record.

[293] So here's, Here's this guy, you know, 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 and their constellation of mobile apps with Instagram, now leading the Series A in Snapchat.

[294] This like Shakespearean drama continues.

[295] And so then the third event that happens in February of 2013 is that poor Reggie Brown, the erstwhile third co -founder, suddenly he's moved back home to South Carolina at this point.

[296] Again, you can't make this stuff up.

[297] 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.

[298] Which actually does work out pretty well for him.

[299] I think he was seeking, it ended up getting resolved.

[300] It was seeking damages of, I think, like half a billion dollars.

[301] And they settled out of court, but I think it was in the hundreds of millions.

[302] Rumored to be.

[303] No, nobody knows.

[304] Yeah.

[305] That is one court case that did not leak.

[306] Yeah.

[307] Well, thank you to that court case for happening, though, because we got this great story to tell.

[308] Much like the same thing with the YouTube Sequoia memo.

[309] We're getting all kinds of great stuff here from the courts.

[310] So then, you know, after that, it's kind of like, you know, inevitable.

[311] So April 2013, 150 million snaps a day, June 2013, which is.

[312] just, what is, what is that, four months, four months after they raised their series A, there is a series B of $80 million led by IVP at an $800 million valuation.

[313] So literally over 10 times the valuation of the series A four months later.

[314] And I remember at this time, people were not sure this was sustainable.

[315] People were like, oh, it's going to be a fad.

[316] And I remember making the argument that the UI was terrible and what they were doing was commodity.

[317] and I remember people talking about, like, are they going to charge for it?

[318] Are there going to be ads for it?

[319] 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.

[320] And that made sense to me at the time.

[321] It seemed like they didn't - Young Ben, you were not yet schooled in the power of the network effects.

[322] Yep, yep, yep.

[323] Boy, it is a mighty moat.

[324] Oh, boy, is it ever.

[325] So that was June, August of 2013.

[326] Facebook is getting desperate at this point.

[327] They release a feature in Messenger that allows you to post to Instagram from Messenger.

[328] Oh, yeah.

[329] Like, this is going to, you know, like take down Snapchat.

[330] September 2013, 350 million snaps per day.

[331] Snapchat announces October 2013, they launched stories, which are incredible that we'll get into later.

[332] And that was game changing.

[333] Totally game -changing.

[334] And then finally, November 2013, rumored, but leaked to many, many press outlets, including the Wall Street Journal.

[335] Mark Zuckerberg makes an offer to buy Snapchat for $3 billion.

[336] He does.

[337] And, you know, there's no, nobody knows exactly where the leak came from there.

[338] I think Zuckerberg sort of alleged, and we know this from the Sony email.

[339] leaks.

[340] Zuckerberg alleged that it was a tactic by Evan.

[341] 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.

[342] But anyway, it never really comes to fruition.

[343] And all we know is that the offer was made.

[344] It didn't happen.

[345] We know the offer was made.

[346] We know it didn't happen.

[347] But it's pretty, I mean, you both have to put yourself in Mark Zuckerberg's shoes here.

[348] Less than a year ago, he flew down to LA and he basically sat there, you know, according to, you know, what we've, what's been disclosed and what we can read about.

[349] 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.

[350] And oh, by the way, Facebook was just going to do it.

[351] So, you know, good luck with your little app.

[352] And then less than a year later, he's again sitting there offering to pay $3 billion in cash for this little app.

[353] which is three Instagrams.

[354] Keep in mind, WhatsApp hasn't happened yet.

[355] So this seems absolutely preposterous.

[356] 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, what should Zuck have done after it was declined?

[357] But, you know, it seems crazy.

[358] And at the time, you've got to think, like, okay, why does Facebook need to do this?

[359] What does Facebook's core competency that is 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 is is just like the perfect storm of more engaging.

[360] 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.

[361] And it's interesting, you know, Snapchat is growing super fast, and I'm sure we'll reach a large number of users at some point.

[362] But their DAU, the daily active users that they report is about 100 million now.

[363] Which is about a tenth of Facebook.

[364] about a 10th of Facebook.

[365] And is, I believe, smaller than Twitter.

[366] Well, Twitter's MAU, I think, is like 3, 400 million maybe.

[367] It's like 300.

[368] And whatever it is, it doesn't grow meaningfully in a while.

[369] Yeah.

[370] But, you know, Ben hit on engagement.

[371] And that is the key here with Snapchat.

[372] I mean, so today they are close it with 100 million daily active users.

[373] They are closing in on just about one billion snaps every single day.

[374] So that's for every active user on the platform, that's 10 snaps per daily active user per day.

[375] And 60 % of people who use Snapchat daily snap every day themselves.

[376] So this totally, Snapchat totally blows up the old paradigm that, you know, 90 % of your users on a social platform, you know, won't create content and 10 % will and 1 % will be super users.

[377] Like 60 % are super users.

[378] Yeah, like if you think about like a Reddit type website or something, you're going to get 90 % lurking, just being the consumers.

[379] 9 % are commenting and then 1 % are actually originating the content that creates the conversation on the site.

[380] And, you know, they just completely upended it by making it stupid easy to create.

[381] Literally stupid easy.

[382] Yeah, like I remember it actually works to their advantage that it's still, looks like this and it's sort of their brand.

[383] 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 will make the whole line dark behind there.

[384] And like, ah, ship it.

[385] It just felt so crummy to me. But like now it's become, if you see that anywhere, you're like, oh, that's a, that's a screenshot at Snapchat.

[386] They should just do billboards of that because that's their brand at this point.

[387] Yeah.

[388] Well, and it's interesting.

[389] you know, I mean, this is one of the reasons why we spent 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, you know, product visionary.

[390] It's not like, you know, 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?

[391] Or is it pioneering, David?

[392] I mean, they really do all these, all these UI paradigm.

[393] 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 stereotypical age group into into more adult usage people like saying I don't know how to use Snapchat and I need my kids to teach me and you know that 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.

[394] And what Snapchat's really done is say, they're like, nope, you open it up and it's in camera mode, and then everything is gestural from there.

[395] And once you learn it, you get incredibly fast at that, and it's like its own language and grammar.

[396] Yep.

[397] And one of the things, there was a great article, shoot, I can't remember where we'll find it in the, and link to it in the show notes that just came out, another one of many profiles.

[398] of Evan and of the company and one of the things it talks about you know it's notoriously been hard to work for Evan and there's been a lot of employee turnover at Snapchat um but one of the things it says in there is that like the any discussion of like well we need 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 like that'll get you fired like right away like the culture they have and that Evan tries to call there is like I don't care what other people have done in the past like we're doing things our way here which I think you I mean you really got to admire 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 tech trends but 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 cells and we'll talk about their revenue model right now is vertical video advertising.

[399] And for the first time, they're forcing content creation to appear in the way that is the most immersive on your phone.

[400] And I think if they're looking at others, they say, okay, well, how do people do ad units?

[401] Oh, it's a feed or, oh, they repurpose, you know, letterboxed video, or they make people turn it sideways.

[402] And that wouldn't be as engaging.

[403] 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 rethink.

[404] thought in this absolute level first way.

[405] They also have basically, I mean, they changed the way that they do user growth and adding your friends with snap codes.

[406] I mean, that is the first time I've seen QR codes used effectively in the wild.

[407] 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 or Google, you ask like, oh, how should we do like an invite system and an adding friend's system?

[408] There's like a templated way to know how to do that.

[409] And this is so different.

[410] It's like, what do you mean?

[411] If they're probably right next to each other, so will be, will it be easy to just show the screen to the other screen?

[412] Yeah.

[413] Okay, cool.

[414] Snapcode accomplished.

[415] Or what if they make it their Twitter picture?

[416] They acquired the technology behind the QR code.

[417] Oh, nice.

[418] Well, I guess good on them for, for, you know, seeing the opportunity to do something new a novel there rather than re -implementing the playbook.

[419] 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.

[420] Like, there's actually not that much innovation that happens, you know?

[421] It's really rare.

[422] I mean, I was...

[423] Yeah, so me in the Facebook, or the PayPal Mafia figures it out once, and then everyone does it after a month forever.

[424] And then that playbook gets disseminated to everybody.

[425] And like, it's really hard.

[426] I mean, I was emailing with the founder I work with today and we're facing a problem.

[427] And I was like, oh, well, we should, uh, let's look at how.

[428] you know, Stripe dealt with this because like they dealt with this problem.

[429] So we should probably like do what they did.

[430] You know, and like it's really dangerous thinking.

[431] But it's also difficult to know.

[432] And it's difficult to know how to do what's right when when you're doing something new and how much to take from the playbook because it is the right thing and how much to be the innovator.

[433] Yeah.

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[457] Okay.

[458] So I think for the structure of the show, what we'll do now is we'll dive into category.

[459] What would have happened otherwise?

[460] We can talk through a little bit.

[461] And we'll kind of wait all the way until we get to render conclusion to talk about their current business.

[462] So that sound good to you?

[463] Sounds good to me. All right, sweet.

[464] So acquisition category, I was torn on this.

[465] And here's how I'll frame it.

[466] 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.

[467] They were buying one single product that people all over the place were using in the exact same way.

[468] At this point, it would be a business line.

[469] It is many products rolled into one.

[470] 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.

[471] And I think that at this point, it would be like the Snapchat business unit of Facebook, rather than, hey, we bought this one -off app.

[472] It has a lot of people using it, like WhatsApp.

[473] It would truly be like they would need their own ad sales team.

[474] They would need a lot of things that wouldn't be able to be factored into.

[475] Facebook.

[476] Yep, I think that's right.

[477] 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.

[478] Yeah, and then, okay, so.

[479] Because it's.

[480] Because it's all of it, right?

[481] Like, it's the people.

[482] It's the technology.

[483] It's the product.

[484] It's the, like, the way the business operates.

[485] All of these things are just wholly different from Facebook.

[486] Yeah.

[487] And this is...

[488] In a way that Instagram and WhatsApp really aren't.

[489] Yeah.

[490] So let's play that out.

[491] So now we're into what would have happened otherwise.

[492] If the acquisition had gone through, this is pre -revenue for Snapchat.

[493] Yep.

[494] 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 his Facebook here they ask you to log in 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 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 XYZ.

[495] I think that's absolutely what 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.

[496] And that is very different than the ad strategy that Snapchat is doing now.

[497] Yeah, this is what makes this, well, listeners are the judge of whether this is interesting or not.

[498] But to me, what makes this so interesting is, like, since the spurned acquisition offer, Snapchat has really, like, totally gone off and become the anti -Facebook.

[499] And that goes not just through the product and the consumer -facing aspects of it, but through the whole advertising platform as well.

[500] I mean, Evan talks about and promises that they will never do creepy targeting.

[501] You know, there is, Snapchat is a brand advertising platform, and they will not track users.

[502] They will not collect data.

[503] Privacy is core to what Snapchat is.

[504] And that's just, that's just anathema to the Facebook and in a lot of ways the Google way of doing advertising.

[505] Yeah.

[506] Yeah.

[507] And as you bring that up, something we were talking about earlier, it makes me think about, okay, so they're not going to have a million checkboxes and drill downs like I can use on a Facebook ad dashboard.

[508] And I was looking into it.

[509] All you can target on Snapchat is geographic location, age.

[510] You get reporting on how many people opened your snap.

[511] And then you get to choose if you appear in a live story or what Discover Channel you appear on.

[512] So you basically get Live Story program, Discover Channel, location, and or gender, and then you get number of people who opened.

[513] It's pretty primitive.

[514] So if I'm trying to do any conversion -based advertising, that's right out.

[515] It's extremely expensive, and I can't quantify it.

[516] And I don't know if I'm actually reaching my core to customers.

[517] But if I'm Coca -Cola, that sounds like a killer brand advertising platform.

[518] I can make sure people see it.

[519] They're like in this moment of discovery when they're looking for it.

[520] It's fully immersive on their screen.

[521] You know, I design it.

[522] And I can target based on content.

[523] Right.

[524] That's the other thing.

[525] So that you have contextual.

[526] And location.

[527] Yeah, contextual targeting.

[528] Location is like getting a little bit into the, the, you know, it would be more interesting to me from a conversion perspective, but also interesting from a brand perspective.

[529] Yeah, but I mean, things like, like I think about, you know, Snapchat, like one of the places where it's really flourished is Coachella in places like that.

[530] So, like, I can target people who are at Coachella.

[531] Right, right.

[532] And the big obvious thing here is there's no links on Snapchat, so I'm never leaving the platform.

[533] It's not like they could link me out to go buy a product anyway.

[534] It's purely one -directional television style advertising.

[535] Yeah, and this is like, this is the kind of stuff.

[536] Like, let's say I'm, you know, Coca -Cola again.

[537] You know, if I'm advertising on Facebook, I'm just black.

[538] 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.

[539] 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 when I target based on it, that's location, which is secondary here, but content wise.

[540] So like all the Discover channel, you know, you know, ESPN or Taste Made, you know, I want to advertise to people who are interested in cooking.

[541] I'm a, you know, I'm, um, you know, Betty Crocker or whatever.

[542] 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.

[543] But when they're watching taste made and watching cooking shows, then I can, then they're in the mode for.

[544] I don't know if the context is better.

[545] 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.

[546] And I think that the context doesn't matter, but the richness of the ad does.

[547] You don't think there are psychological associations between content and advertising?

[548] I do.

[549] I just don't think that seeing an ad on Facebook is contextually worse than seeing it on Snapchat.

[550] I'm already in entertainment mode.

[551] I could see that if you're 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 like you know 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.

[552] Fair enough.

[553] I still think, like, you know, when I'm on ESPN and Discover and I get Axe Body Spray, I mean, I would never wear Axe body spray, but so I claim on the internet.

[554] But, like, I don't know.

[555] Like, to the extent you could make an argument that television is still very valuable, it's like this is the argument.

[556] Which you absolutely can.

[557] So 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.

[558] I'm not sure, conversion -based advertising.

[559] I don't know.

[560] Direct response.

[561] Direct response.

[562] That's, yeah, there you go.

[563] And advertising stays relatively fixed as a percentage of the GDP.

[564] It's between 1 and 1 .4 % of the GDP.

[565] ever since the notion of, you know, advertising was invented in the United States.

[566] And so with that staying about flat, you know, the GDP will grow some, but with that staying, you know, about fixed, it's about allocation.

[567] 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.

[568] Can they be, you know, the television of the future?

[569] There's no good place really to do it online right now.

[570] I mean, we did a past show on YouTube.

[571] 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.

[572] 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.

[573] There are 10 seconds, and you kind of want to skip them less.

[574] 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.

[575] Basically, like, I've got 10 seconds.

[576] If you can captivate me, I'm good for 10 seconds.

[577] Whereas on YouTube, like, running a pre -roll for a minute where I have to wait five seconds.

[578] 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.

[579] Especially not on mobile.

[580] Especially not on mobile.

[581] Great point.

[582] And Snapchat is like totally piggybacking.

[583] 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.

[584] 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.

[585] And again, back to like, even Instagram and, you know, as our listeners know, we're big fans of Instagram, but like you got to scroll through the damn feed.

[586] You do, you do.

[587] And, God, as a completionist, it kills me that it snaps at the top every time.

[588] So I have this like fear of opening Instagram now because what if I get partway down?

[589] And then there's some pictures that I missed.

[590] 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.

[591] And literally you just open the app and maybe you like, you know, you open the app, you swipe left, you tap.

[592] And now with stories auto playing to the next story, that's all you got to do.

[593] Yeah, I think their average time viewed an app right now is like 30 minutes.

[594] I mean, they command a tremendous amount of attention.

[595] 30 minutes with two taps and one swipe.

[596] Yeah.

[597] I mean, it's the attention war.

[598] I mean, that's what this really comes down to between Facebook and Snapchat.

[599] And actually, this is another great conversation I was having earlier this week, Instagram redesigned.

[600] And boy, is it gorgeous.

[601] It just shows off just the content.

[602] We won't talk about the icon.

[603] But inside, it is like so nice.

[604] 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 when you go to Snapchat that my responsible Snapchat's like a crowded bar like there's you know there's content flying everywhere it's it's loose it's fun and like that just creates a platform that is just commanding of way, way more attention than that museum feel.

[605] How much relative time do you spend in museums versus bars?

[606] Yeah, well, I might be non -representative.

[607] But maybe not.

[608] Maybe not.

[609] Anyway, all right.

[610] Let's start driving this towards home.

[611] Okay, tech trends.

[612] You know, I think we touched it all mine.

[613] Yeah, mostly mine too, but I'll just call it out again.

[614] We've talked about this on the show.

[615] I think it's maybe been one of my tech trends in the past, but a perfect example of start small.

[616] You know, like they started with nothing, but start small, nail it for one audience and grow from there.

[617] And I mean, they didn't even do this intentionally, but like, you know, 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.

[618] Classic case.

[619] Yep, yep, yep.

[620] And as Paul Graham says with that, try and get to the 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 able to get to the higher economy 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.

[621] All right.

[622] Conclusion?

[623] So normally we would throw out, like, was it a good decision to make this acquisition?

[624] And so I was thinking for this one, you know, was it a good idea if you're a Snapchat shareholder to, you know, decline this offer?

[625] And David has a more interesting framework, I think, because that one's just a sure thing, right?

[626] It's like, oh, I'm a Snapchat shareholder.

[627] Do I want to be worth $3 billion or the $16 billion it is value?

[628] on paper today and will likely continue to grow.

[629] So David, what's your framework?

[630] So I thought we could do grade Mark Zuckerberg and Facebook for the decision to walk away after the $3 billion versus trying harder to make the acquisition happen likely at a higher price.

[631] Yeah.

[632] And this one's interesting because I think it presents a little bit more than just like obvious shareholder value.

[633] 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.

[634] There might be like a personal pride thing on the line there.

[635] 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.

[636] Facebook needed to offer more.

[637] Like, it was, I give Facebook an F on not going and bidding higher.

[638] I think this one is like so clear cut at this point.

[639] I would love to hear your thoughts, though.

[640] Yeah, I've been thinking about this.

[641] I actually, I'm going to be, I'm going to be, our listeners are going to love this.

[642] I'm going to be divisive here.

[643] I'm going to give them an A. And the reason I'm going to 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.

[644] Like, never would work.

[645] Like, these are just two companies that cannot exist together.

[646] 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.

[647] Like, okay, let's say he had bid Snapchat up to, I don't know, $15 billion or $19 billion, what's app territory.

[648] And then come back in.

[649] And then this guy, Evan, would come into the company and basically be like, you know, F you everybody.

[650] Like, I do things completely differently here.

[651] I stand for everything that you are not, you know.

[652] What would that have done, right?

[653] And like, Facebook has been super successful in the two and a half years since this time.

[654] 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 yes I was thinking about digging in here but I'm 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?

[655] Or would there just have been this implosion beforehand, like you say, of like culture mismash.

[656] A lot of the 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.

[657] And could that have existed within Facebook?

[658] Right.

[659] That's a really interesting question.

[660] If you logged in, what would Snapchat be like if you logged in with Facebook?

[661] That'd be weird.

[662] Yeah.

[663] Yeah, I mean, they're only, they're only, they're projected to get or earn about $300 million of revenue this year.

[664] So, I mean, their evaluation is like not, not based on their current revenues at all.

[665] It's based on the promise of the future that it can replace television brand advertising.

[666] Yep.

[667] And I don't know what I would change my great.

[668] too, but I totally, totally see your argument that, that, you know, if Facebook continue 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.

[669] And that's why we need new startups to come and create value that incumbents never could create.

[670] Yeah, I mean, this seems like a classic case of, you know, we saw it with poke.

[671] Like, they recreated it, you know, pixel for pixel.

[672] And it just doesn't work inside Facebook.

[673] No. I mean, yeah, there was the network effect mode, too, but like, it was still so small at that point.

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[675] Statsig.

[676] So many of you reached out to them after hearing their CEO, Vijay, on ACQ2, that we are partnering with them as a sponsor of acquired.

[677] Yeah.

[678] For those of you who haven't listened, Vijay's story is amazing.

[679] Before, founding Statsig, Vij spent 10 years at Facebook where he led the development of their mobile app ad product, which, as you all know, went on to become a huge part of their business.

[680] He also had a front row seat to all of the incredible product engineering tools that let Facebook continuously experiment and roll out product features to billions of users around the world.

[681] Yep.

[682] So now Statsig is the modern version of that promise and available to all companies building great products.

[683] StatsSig is a feature management and experimentation platform that helps product teams ship faster, automate A -B testing, and see the impact every feature is having on the core business metrics.

[684] The tool gives visualizations backed by a powerful stats engine unlocking real -time product observability.

[685] So what does that actually mean?

[686] It lets you tie a new feature that you just shipped to a core metric in your business and then instantly know if it made a difference or not in how your customers use your product.

[687] It's super cool.

[688] Statsig lets you make actual data -driven decisions about product changes, test them with different user groups around the world, and get statistically accurate reporting on the impact.

[689] Customers include Notion, Brex, OpenAI, FlipCart, Figma, Microsoft, and Cruise Automation.

[690] There are like so many more that we could name.

[691] I mean, I'm looking at the list, Plex and Versel, friends of the show at Rec Room, Vanta.

[692] They like literally have hundreds of customers now.

[693] Also, Statsig is a great platform for rolling out and testing AI product features.

[694] So for anyone who's used Notion's awesome, generative AI features and watched how fast that product has evolved, all of that was managed with Statsig.

[695] Yep.

[696] If you're experimenting with new AI features for your product and you want to know if it's really making a difference for your KPI's Statsig is awesome for that.

[697] They can now ingest data from data warehouses.

[698] So it works with your company's data wherever it's stored so you can quickly get started no matter how your feature flagging is set up today.

[699] You don't even have to migrate from any current solution you might have.

[700] We're pumped to be working with them.

[701] You can click the link in the show notes or go on over to stat sig .com to get started.

[702] And when you do, just tell them that you heard about them from Ben and David here on Acquired.

[703] All right.

[704] In the interest of time, skipping the carve out today?

[705] Yeah, we can skip the carve out.

[706] If you want to discuss more, us on Slack in our Slack community.

[707] Yeah, because God only knows my opinions are going to continue to waver on this.

[708] So we'll see you in there.

[709] All right, till next time.