Snapchat's Founders Make $3 Billion Bet on Themselves

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange.
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Unprofitable social media companies seem to be doing well these days. Twitter Inc. now has a stock market value of about $24 billion. Snapchat Inc., which allows users to send pictures and text that are automatically deleted shortly after viewing, just turned down an all-cash acquisition offer of at least$3 billion from Facebook Inc., according to the Wall Street Journal. That's a staggering valuation for a company euphemistically referred to as "pre-revenue." Yahoo almost bought Facebook itself for just $1 billionin 2006. Many commentators suggest the young founders were foolish to pass up that much money, but it's possible the decision to maintain control was wise.

About 350 million "snaps" are sent every day, according to the company, while Forbes estimates that the service has about 26 million U.S. users. Many are under 30 years old. Many just send each other the same kinds of pictures they now post on Instagram, although a few users take advantage of the medium's ephemerality to send racier messages.

There could be a lot more room for growth given rising concerns about privacy. Dan Primack notes that "Snapchat is providing its users exactly what existing services like Facebook and Twitter and Tumblr are not." John Carneythinks workers in the financial sector may use the service to communicate about unsavory activities without having to worry about getting investigated by the Securities and Exchange Commission -- a very attractive demographic for advertisers. No wonder Snapchat is looking to raise money from outside investors at a valuation even higher than what Facebook was offering.

But even if Snapchat became the global standard for messaging on the sly, it could still have a hard time making money. Most of these services sell ads based on detailed knowledge of user behavior. But Snapchat's entire premise is that it doesn't track what you do. That would make it far harder for it to sell targeted ads. Forcing all of its users to view the same ads doesn't seem like the most promising strategy.

Ultimately, the decision to hold out or cash out isn't obvious. Facebook is now worth about 118 times what Yahoo almost paid for it. Even Groupon, which many say blundered by turning down Google Inc.'s $6 billion acquisition offer three years ago, was able to go public at a valuation several times that amount. Despite a substantial decrease in Groupon's stock price since then, traders still think the company is worth about $7 billion. Snapchat's founders are young and intelligent. They may never again have the opportunity to become as rich as they could have been had they accepted Facebook's offer. But that doesn't mean they were foolish to focus on building their business and maintaining their independence.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.