What is going on these days? Every time I turn around another company is either not making any money at all or they are operating at a loss and worth a Billion dollars or Billions of dollars? Snapchat was offered $3 Billion?
Here is my memo to the founders of Snapchat and I also want to share with them my rule. As someone who almost sold for millions of dollars right before the first internet bubble and market crash only to see our negotiations stop when the market did crash and our potential acquirer lost 80% of their value, here is my rule. This rule particularly applies to those who have companies with 0 revenue, that’s zero revenue. At the time I did have revenue but the rule I came up with after that near millionaire miss is simply this:
“If anyone ever offers you money for anything … take it”
– Brian’s Startup Rule
Also as a founder, never forget this:
“Your Investors have invested in multiple companies, if you hit it big they are happy, if you miss and go bankrupt it does not effect them as it effects you. They have other horses in the race, you do not.”
– Common sense
$3 Billion Offer
Apparently the company Snapchat was offered $3 Billion by Facebook. Here is an excellent article by Matthew Klein at Bloomberg about the offer. When it comes to company valuations I know that often times the “value” of the company is just a shot in the dark, there are formulas to multiply earnings, or value a company based on a dollar value for each user, and many others, such as the active users and possibly total “snaps” that occur which is very impressive and they say is at 350 million snaps a day.
My Memo to Snapchat
I am going to make three assumptions based on what I have read. First, I assume you have a decent amount of stock. Second, you make $0 in revenue. Third, I assume Facebook did indeed offer you $3 Billion. If my assumptions are correct then I can only come to one conclusion, you are making a huge mistake. A billion dollars for a feature? Wakeup, Facebook is not paying you $3 billion dollars because you are worth $3 billion dollars. Facebook is stuck in the public market game where they need to keep their key metrics moving up and to the right.
Could they take a billion dollars, hire a bunch of people, sit them in a building and build Snapface? Of course they could, and a lot cheaper than they are paying you. So why don’t they? Because they have to meet their quarterly numbers and it is faster to just buy you then build. Their numbers among younger users appear to be decreasing, by purchasing you they immediately have a segment of the younger market that they need. Again – they have no choice but to acquire due to public market expectations – you are not worth billions of dollars at this point. That does not mean you will not come up with an amazing advertising model, subscription model, or in app purchases, that generates 100’s of millions of annualized revenue, but that remains to be seen. Because eventually you will need that to justify a forward looking valuation in the billions of dollars.
What Are the Options? There are two options: to sell now or not to sell now. If you sell you get $3 Billion. The other option is to not take the money and achieve one of three outcomes: (1) grow the company, go public and have a valuation of over $3 Billion [around what Twitter (NYSE:TWTR) is at this time, and twitter has revenue], (2) you end up staying private and selling later for $3 Billion or more; (3) for some reason, either your mistakes or competition, you sell for less than $3 Billion. So you can take $3 Billion now or take your chances.
What if you are too big to buy? Let us assume you do a next raise of $225 million on $3.8 Billion like pinterest did and this article seems to infer you might also do. That means that the current investors need you to sell for significantly more that $3.8 Billion for them to make money. There is a valuation that eventually is too high for anyone to purchase you, you may take investment and need such a high valuation that you have no choice but to keep going on your own. Of course you could sell for less and those investors, the next round of gamblers, lose some money. But it is a real risk that you end up being too big to buy.
What if the Founders Have No Choice? It is possible that due to the prior rounds of funding, the founders do not have the power to sell the company. The power may be completely in the hands of the investors. In that case, my apologies to the founders, you are in a pickle. It is not uncommon.
Take my ramblings as those from someone who failed and did not sell my first online company for millions at the time. So you could write off my opinion as an opinion from someone who failed and therefore is useless, or you could ponder my opinion because sometimes the best lessons learned are from failure.
PS: By the way, my business partner Chris pointed out that the main feature of photos becoming deleted so only the receiver can view them does not seem to work or not be as private as users are lead to believe. I only say that based on this article: How to save a Snapchat. That could be a big valuation problem, or not, what do I know.