After these disastrous depositions, Evan and Bobby replaced Cooley with David Quinn and the team at Quinn Emanuel Urquhart & Sullivan, the same firm where Lee and his partners got their start. It was also the firm that represented the Winklevoss twins in their infamous suit against Mark Zuckerberg and Facebook. David Quinn was tenacious in and out of the courtroom, running Ironman triathlons in his free time. Evan and Bobby were convinced Quinn Emanuel could use their experience from the most infamous startup lawsuit of all time to help them defeat Reggie.
Quinn Emmanuel was much more aggressive than Cooley had been. They filed a sea of requests for documents, depositions, and subpoenas. They tried to dismiss the case and remove it to federal court, and they sought contempt sanctions and a restraining order against Reggie and Lee Tran & Liang.
Lee Tran & Liang tried to have Quinn Emmanuel thrown off the case, as Reggie had tried to get another Quinn Emmanuel lawyer to take his side of the case before he went to Lee Tran & Liang. Ultimately, the judge ruled against Reggie and said the waiver Reggie had signed and the ethical wall Quinn Emmanuel erected were sufficient for them to continue representing Evan, Bobby, and Snapchat. Lee Tran & Liang also tried to sue all of Snapchat’s investors, claiming their shares were diluting Reggie’s one-third stake. They even lined up a tell-all interview for Reggie with GQ magazine, but he backed out at the last minute. At one point, Lee’s partner Luan Tran took a copy of Forbes magazine with Evan on the cover, scrawled red devil horns over his head, and pinned it to the wall in his office.
The combative trial would wage for months, and each side had plenty more cards to play. Reggie claimed he owned one-third of Snapchat’s intellectual property since he filed the original patent (which, again, was never approved). He also claimed that they had entered into an oral partnership agreement when he and Evan initially agreed to split everything 50/50 (before they brought Bobby in).
Evan and Bobby claimed Reggie was merely working with them on a project, and they never agreed to an equity split; because they used the Limited Liability Company (LLC) structure that Evan and Bobby had set up for Future Freshman rather than a whole new one, they claimed Reggie should know he had no equity in the venture.
One of the most difficult parts of the case was that Snapchat’s valuation continued to soar throughout the lawsuit, climbing from $70 million when Reggie filed to $800 million in a matter of months. Soon, the company was worth billions. If Reggie was owed something, what was a fair amount? If a picture is worth a thousand words, and Evan’s disappearing pictures company was worth millions and then billions, how much was Reggie’s idea worth?
The lawsuit had a significant effect on Evan; he was already secretive and a bit paranoid by nature, but the lawsuit, combined with Snapchat’s growing public profile, made him retreat further into the bunker—he preferred to take walking meetings so that others wouldn’t overhear him, and he noted that iMessage and emails are permanent records. The stress was clearly getting to him. He would frequently blow up at his lawyers, screaming at them in the hallways in between depositions and settlement talks. It would be many months before the lawsuit reached a conclusion.
CHAPTER THIRTEEN
THE PHENOMENON
MAY 2013
VENICE, CA
Snapchat kept growing in users and in frequency of use. It had become a verb: Snapchat me that; Snap me. Users had grown from 3 million in the fall to 10 million in the spring, while photos shared per day shot up from 50 million in December 2012 to 150 million in April 2013 and again to 200 million in June 2013.
Most social networks track users by daily actives—that is, how many people visit the website or use the app on a given day. Other businesses with less frequency of use—like Amazon or Airbnb—focus more on monthly active users. In Snapchat’s case, teenagers were so addicted to the app—opening it and sending and receiving snaps dozens of times per day—that the company started focusing on hourly active users.
Poke’s failure had provided convincing proof that Snapchat had built an app that was defensible—a bigger company couldn’t just copy it and wipe them out, which made it extremely attractive to venture capitalists. Evan reopened conversations with many of the venture capitalists who had been chasing the company. These VCs quickly began seeing Snapchat in a similar light as Instagram when the photo-sharing app raised its Series B, a $50 million round at a $500 million valuation right before it was acquired by Facebook.
Snapchat’s Series B valuation started in the low hundreds of millions, with many blue-chip backers like General Catalyst Partners, Greylock Partners, Charles River Ventures, and Institutional Venture Partners trying to get in the round.
Evan took advantage of Snapchat’s strong negotiating position to extract favorable terms from investors. When he met with Institutional Venture Partners’ Dennis Philips, Evan told Philips he would not accept IVP’s standard investment terms.
“If you want standard terms, invest in a standard company,” Evan told Philips.
The valuation climbed and climbed as backers offered higher valuations to win the deal. When the dust settled, Evan had driven the price up to an $80 million raise at an $800 million valuation. General Catalyst finally got their meaningful stake, while SV Angel joined the round and previous backers chipped in.
As part of the deal, Evan and Bobby each sold a small portion of their equity in exchange for $10 million apiece in cash. For the venture capitalists, this was great—they got to buy more stock in a red-hot company, and it aligned the founders’ incentives with the VCs; venture capital firms see their returns follow a power law, where one investment makes them the majority of their money while most of their investments fail. If the founders have $10 million sitting in their pockets, they will be more likely to aim the company for the bigger, longer-run exits or IPOs rather than selling for less.
Amazon CEO Jeff Bezos summed up this idea in a letter to his shareholders, writing, “We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”
An $800 million valuation for a two-year-old company that wasn’t generating revenue, combined with the young founders each receiving $10 million in cash, soon generated a backlash. Media pundits, tech industry experts, and bankers screamed that Snapchat was the canary in the coal mine showing that the whole tech industry was in a bubble. It was threatening to people’s world order that a disappearing photo app with no revenue and no plans to start making money could go from college dorm idea to $800 million in two years.
“The round, which values the photo-sharing company at $800 million pre-money, means that Snapchat is now an $860 million company in the eyes of venture capitalists—a staggering valuation after less than two years of operations and not a cent of revenue” wrote Forbes’s J. J. Colao.
“What Snapchat doesn’t have yet, however, is revenue. Nor does it have easily identifiable paths to revenue,” added Fortune’s Dan Primack.
Snapchat has been consistently underestimated in part because it is difficult to wrap one’s head around the idea that a simple, free, photo-sharing app can tap into such a large market. It seems silly to think that this gimmicky entertainment device in our pockets could be worth so much, but the fact that it is in our pockets and used daily, if not hourly, sheds light on why. The number of smartphones in the world is an order of magnitude larger than the number of PCs, and the gap is growing. And unlike desktop computers, mobile phones are with us nearly 24/7.
Previously, time spent on media, whether browsing on a PC, watching TV, reading the newspaper, whatever, was very intentional. You sat down to
read The New York Times or to watch Friends. But now we’re primarily filling empty space when we take our phones out of our pockets—we’re bored waiting in the checkout line, we’re bored riding the subway, we’re bored by the commercial on TV.
As naturally social creatures, we spend a lot of time on our phones with other people—messaging, liking, hearting, and retweeting things until our thumbs bleed. And there isn’t a fixed amount of time for this—as pages load faster and Facebook and Snapchat and Instagram add more and more features, the time on mobile eats into everything else—time spent watching TV, using a PC, reading, staring at the sky, and, yes, sadly, probably talking to other humans. Be honest with yourself—how many times have you put this book down to check something on your phone? That’s why mobile offers such an enormous opportunity.
Take a look at your phone. How many apps have you used today? How many have you opened every day for the last week or so? Of those apps, how many are not owned by Apple, Google, or Facebook? Most people will find that final list to be quite short. The average smartphone user has about ninety apps on their phone, but uses only seven or eight on a daily basis. According to market-research firm Verto Analytics, Apple, Google, and Facebook-owned apps account for 60 percent of users’ time and 80 percent of advertisers’ dollars spent on mobile.
For most kids in high school and college, Snapchat has become one of those daily-use apps, if not their top app. Having someone’s attention is incredibly valuable. Whether a bar is advertising its happy hour, Walmart is selling toothpaste for mere cents (as it did in its early days), or Taco Bell is running a publicity stunt claiming it had sponsored the Liberty Bell, if you have someone’s attention—whether they are in your physical store or in your digital world—you can make money.
Meanwhile, the media still portrayed Snapchat as primarily a sexting app. A lengthy February 2013 New York Times feature read, “The Snapchat service, which started two years ago but has steadily gained users, has been painted as a popular way for people, especially teenagers, to send naughty pictures.” Growing popularity and competition from Facebook helped change this sexting narrative some, but reporters still leaned on it, as sexting headlines earned plenty of clicks.
Many people outside the company wondered aloud how it was possible or fair that Snapchat could be worth $800 million. As popular as Snapchat had become with the high school and college crowd, it still had very few users older than twenty-five. So older people, like these media talking heads, only saw a disappearing photo app that they didn’t understand. They didn’t yet realize that kids weren’t simply using Snapchat to share pictures.
“People wonder why their daughter is taking 10,000 photos a day,” Evan later said. “What they don’t realize is that she isn’t preserving images. She’s talking.… It’s not about an accumulation of photos defining who you are. It’s about instant expression and who you are right now. Internet-connected photography is really a reinvention of the camera. And what it does is allow you to share your experience of the world while also seeing everyone else’s experience of the world, everywhere, all the time.”
Of course, it didn’t help that Evan and Bobby spent the money like, well, young rich kids in LA. Evan bought a red Ferrari and started learning to fly helicopters, although he still lived at his dad’s place in Pacific Palisades. Bobby bought a modern, concrete-and-glass-styled $2 million house in Venice, a block from the beach and a five-minute walk from Snapchat’s office.
But the press and money did not distract Evan. Having grown up around Hollywood and wealth, he knew when to have a good time and party and when to focus on work. He was single-minded about his vision for the future of the world, and he was focused on doing everything in his power to bring that to fruition.
As fun as the blue bungalow on the beach had been, it had become very distracting to work there. People would constantly take selfies in front of the big yellow Snapchat logo and peer in to catch a glimpse of the team. Plus, an influx of young talent was making the beach house crowded—the long table packed with monitors, sodas, and coffees where the engineers built the future of social media wouldn’t hold the entire team for much longer. Evan moved the company a few blocks away to a former art studio near the Venice boardwalk. This time, they skipped the big yellow Snapchat sign and inscribed a small, barely visible outline of the Ghostface Chillah logo on the wooden front door.
With their new larger office and more funding in the bank, Evan and Bobby decided to expand Team Snapchat, tripling the team from ten to thirty in 2013. Every one of a startup’s early employees is a crucial hire. A players tend to attract and hire more A players, propagating a virtuous cycle that fills the team with talent; on the flip side, B and C players attract their peers, filling even the most promising young companies with mediocrity. Evan and Bobby had hit the nail on the head with their initial hires: David, Daniel, and Dena are all still at the company as of this writing, and all had played crucial roles in the company’s success. But Snapchat was becoming too large and needed too much help to keep the team this small.
Chloe Drimal, a gregarious lacrosse player at Yale University, caught Evan’s attention with her funny, insightful, and fearless columns for the Yale Daily News that were unafraid to touch on taboo subjects. In “Profile of a SWUG,” she described a Senior Washed Up Girl (SWUG):
She’s the girl who promised she would never hook up with someone younger than her but now finds herself texting sophomore boys who unavoidably turn her down. She thinks this is funny. She thinks about getting a vibrator; she may already have a vibrator. It may be better than that sophomore boy.
Her social commentary frequently touched on social media, including a piece called “Newest Diet: Facebook Cleanse.” But the article that caught Evan’s attention was from December 2012, titled “Snapchat: The Phenomenon”:
I was first introduced to Snapchat on the patio of Box 63 during Camp Yale this year. “You have to download this app—it’s so fun,” said an already proficient snapchatter.
I thought it was stupid. I didn’t get the point of taking a picture that would inevitably disappear. But I did start sending “snaps” of my friends and me, mimosas in hand, to the few users that showed up from my contacts. Then I kept using it. Every day. Then new friends started Snapchatting me. Then my daily Snapchat notifications jumped from five to 35. Then, my friend started referring to his iPhone as his “Snapchat machine.” And then, yesterday, my friend was invited to DKE formal through a Snapchat.
Snapchat stopped being just an app and turned into a culture, a phenomenon. It’s basically Twitter combined with texting combined with crack. Twitter gives you 140 characters to say your thought or what you are currently doing; Snapchat gives you 31. A text is permanent; a Snapchat is gone within 10 seconds.
Anyone who has you in his or her contacts can Snapchat you. I doubt that you would refer to everyone in your contacts as a friend, and I am positive that you wouldn’t text most of them at 11 a.m. on a dreary Monday just to say, “I hate Spanish,” or “All I want for Christmas is you.” But these are just two of my Monday Snapchats from people that I would never text, and who would never text me at 11 a.m. on a Monday. But now, because of Snapchat, I’m receiving a picture of their face during a lecture on a dreary Monday, and you know what? I like it.
And I’m not the only one. I’m not the only one that feels legitimately closer to some junior guy because I receive a Snapchat every time he moves from the eighth to the fourth floor of the Stacks.
Because of Snapchat, we feel more connected to the girls and guys we used to know solely in terms of bars and fraternities. We know who has a lot of work and who doesn’t. We know who is hung over and who is on a walk of shame. Best of all, we can see it. We see the aftermath of that looming senior thesis or that Zeta late night.
I think Evan Spiegel, the founder of Snapchat, understood our generation when he put a time limit on a picture message. Maybe he didn’t mean to, but he took technology backwards a bit, bringing u
s a little closer to what real human interaction is supposed be. It’s supposed to be a memory, not something tangible.
A conversation with a friend at Flavors is not transcribed and then published on the Internet, searchable by future job prospects. It is simply left as a memory. And when we retell the story tomorrow, we might misquote our friend or forget some details—but that’s OK. That’s what human interaction is about.
That’s what Snapchat is about. You see it for a few seconds, then it’s just a memory.
By taking out the forever part of a picture or text, more people want to share. They aren’t afraid to put themselves out there, to send an ugly picture that may turn someone off or a beautiful picture that may seem narcissistic. They know it will eventually disappear.
We are a generation of the “Like” button, of the comments box and the anonymous comments box. Of statuses and tweets. We post things online, aware that anyone can see them. Aware we are being judged and almost always looking for approval—for that “Like.”
Snapchat is different. It’s fun without the terrifying permanence of the rest of our technology.
Hopefully this is just the beginning. Hopefully our culture can go back to a time when we weren’t scared to share too much. But for now, my username is Chaoticklowy, and I accept silly faces, hungover stares and, of course, formal invites.
Few people had better articulated why Snapchat was resonating so strongly with its users. So when Drimal graduated Yale in the spring of 2013, Evan hired her to join the small team and work on a soon-to-be-created content section of Snapchat.
Next, Evan turned his attention to Nathan Jurgenson, a PhD student at the University of Maryland. In 2011, Jurgenson, writing on a social sciences blog called Cyborgology, introduced a term he called “digital dualism,” arguing that the distinction between the virtual and real worlds is a fallacy. He rejected the distinction between “real” and “virtual” worlds, or the notion that we live and act one way in person but build and create a separate identity online. In Jurgenson, Evan found a provocative thinker who managed to capture and describe Snapchat’s core ethos before he’d even heard of the app. Jurgenson would go on to influence Evan’s thinking and Snapchat’s strategy in a deep way.
How to Turn Down a Billion Dollars Page 11
