Should Snapchat have accepted Facebook's $3bn offer?

Twenty-three-year-old Snapchat co-founder and CEO Evan Spiegel is reported to have rejected a $3 billion offer from Facebook for the instant messaging app. The offer would have been Facebook’s most expensive purchase to date and yet Spiegel and his co-founder Bobby Murphy, 25, made the decision to decline the cold hard cash and hold out for even higher offers next year, when they expect the app to have gained yet more followers.

Snapchat is essentially a photo and video sharing application, however it allows users to set a time limit of up to 10 seconds on each message. After that time, the image or video will ‘snap’ and disappear forever.

Spiegel and Murphy thought of the idea while studying at Stanford University and developed the first version – then called Picaboo – for part of Spiegel’s product design degree. Despite jeering from classmates the two fraternity brothers decided to pursue the idea and launched the tech startup from Spiegel’s father’s sitting room in September 2011. Two years down the line, more than 350 million images are shared via Snapchat every day. Furthermore, a recent study conducted by the Pew Research Center highlighted that nine percent of US smartphone owners used Snapchat, including 26 percent of 18 – 29-year-olds. Snapchat is also extremely popular with younger teens – a reason why Facebook is thought to have been so keen to purchase the app.

In fact, Facebook has been hankering to get hold of Snapchat for some time. Founder Mark Zuckerberg is thought to have approached the LA based firm with a previous offer in the region of $1 billion (approximately the same amount it bought Instagram for earlier this year) before upping the stakes.

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Snapchat, as yet, has no revenue stream whatsoever

The news of Facebook’s offer comes directly after Twitter’s IPO last week, in which the micro-blogging site was valued at approximately $25 billion despite remaining unprofitable. Snapchat is yet to make any profit whatsoever and while similar companies such as Instagram have opted for an advertising model, Spiegel is thought to be more inclined to pursue the possibility of charging users for added services and in-app transactions.

Notwithstanding, the firm has managed to generate a significant venture capital investment. In June this year it generated more than $60 million from a funding round, which bought the valuation of the company to $800 million. So while the company is not faring badly there have been other companies that have given up the opportunity to be bought out, only to crash dramatically within a couple of years.

Take Groupon as an example. In 2010 the online daily deals firm declined a $6bn offer from Google. In February this year it founder, Andrew Mason was fired after the company fell in value by $10 billion. Digg – once hailed ‘the next big thing’ in social media also made the decision to turn down a $200 million offer, only to end up selling for $500,000 in 2012. And Pointcast, the pioneer of ‘push’ technology snubbed News Corp’s $450 million offer in 1997 and sold for just $7 million two years later.

So, has Spiegel made a wise business move or terrible mistake?

In its short life, Snapchat has also had its fill of controversy. The photo-sharing app has been accused of encouraging ‘sexting’ among young teens with some researchers claiming that almost half of 18 to 30-year-olds using the app have sent or received naked images.

With this in mind, is Snapchat a short-lived fad that will fade and die like so many other tech startups, or does it have the strength and relevancy to follow in the footsteps of Twitter?

Sanjay Sabnani, Chairman and CEO of CrowdGather writing for Forbes believes that Spiegel and Murphy have made the right decision. He says, “Snapchat has the potential to build something that is much bigger and management has so far demonstrated that they have the chops and ambition to get this done.

“Imagine a world where your default messaging is comprised of snapchats as a primary means of communication instead of just using text message? I think this is already happening in a way, and this is why I believe that Snapchat still has room to grow and bargain for more money in a sale in the near future.”

However, Alex Moore, writing for deathandtaxes thinks the very opposite, “It takes a special kind of hubris to turn down $3 billion dollars,” he says. “Spiegel has investors who’ve dumped truck-loads of cash into the company, and they no doubt want their eventual pay out to be as high as possible. But Snapchat isn’t Facebook - it’s not a network with a lock-in effect that becomes inevitable once everyone starts using it. It’s a tool with competition from similar products, like Wickr, and its star could fall as easily as it’s risen.”

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The 23-year-old Snapchat co-founder and CEO who said no to a $3bn offer from Facebook