How to Turn Down a Billion Dollars

by Billy Gallagher

  The key paragraph in his email began with “THAT SAID,” in which he describes how Snapchat was fortunate to be in the very early days of the mobile market. Snapchat was a top five mobile brand as an enormous new opportunity developed. This vision was how Evan attracted and retained talent to make Snapchat a great company.

  Unlike many founders, Evan wasn’t aiming for the highest possible valuation right now. He was worried about the hurdles standing in Snapchat’s way and thinking strategically about how his moves now set up his options down the road on the way to a Snapchat IPO.

  He was as obsessed with Snapchat being a permanent company as he was with Snapchat being an impermanent product. This is the best idea Evan will ever have. He will not sell it to someone else. And he will not screw it up himself.

  CHAPTER SIXTEEN

  HAPPY NEW YEAR!

  DECEMBER 31, 2013

  LOS ANGELES, CA

  While they didn’t have $3 billion, Evan and Bobby felt like they had billions of reasons to celebrate 2013. Stanford’s football team was again playing in the Rose Bowl, so they would throw another New Year’s Eve party. The company had outgrown the beach bungalow for a working space, and the guest list had certainly outgrown it for a party venue. And the company had grown too mature to throw a party at the new office.

  I stepped out of the Uber with a half dozen friends from Stanford and straightened my jacket, staring at the inconspicuous entrance to a big, lofty warehouse on a deserted street. Unlike the previous year’s bash, where they simply asked that you not take photos, this year security confiscated everyone’s phones at the doors. Evan’s desire for privacy had risen right alongside Snapchat’s heightened profile. Deciding our phones were a good trade for the open bar, we entered the party.

  Hundreds of people, mostly from Stanford and Crossroads, as well as friends of Snapchat employees, mingled around the big circular bar in the middle, throwing back shots and toasting to a great year. The couches and low tables to the rear of the main bar were mostly unused as people gathered in the front on the dance floor.

  Past the bar and dance floor was a big alley filled with a huge inflatable slide, food trucks, and, of course, more open bars. There I joined a circle of friends sharing a contraband phone to call our significant others and wish them a Happy New Year.

  Throughout the party, people wondered aloud, “How had one of Evan’s schemes become this?” “Weren’t they nuts to turn down $3 billion?” “What would you do with $3 billion?” “First, I’d throw a party like this.” And on and on it went.

  The VIP area this year was significantly, and literally, elevated. Suspended on a narrow bridge above the main bar and rest of the party, Evan and Bobby mingled with friends, coworkers, and dates. Evan’s date for the evening was one of the biggest stars on the planet: Taylor Swift. One of her famous pals, Modern Family star Sarah Hyland, also hung out upstairs. Swift’s presence seemed to simultaneously lend an air of credibility to the event and make it seem like an even more far-fetched fairy tale. An enormous pop star was Evan’s date—clearly Snapchat had proven it was much more than a sexting app. And yet, how was it possible that I, a mere college senior, was partying in the same room as Taylor Swift? Nights like this can seem absurd in the moment, only to fade with time. The surreal nature of that night has only grown with time. Evan and Taylor, both stars, would grow to become even bigger stars.

  It had only been two short years since Snapchat took advantage of front-facing cameras on iPhones to explode from an unknown startup to one of the fastest-growing tech companies on the planet. As Snapchat grew, the selfie tipped over into the mainstream. President Barack Obama made worldwide headlines when he joined Danish prime minister Helle Thorning-Schmidt and British prime minister David Cameron in a smiling selfie during a memorial celebration for Nelson Mandela in Johannesburg, South Africa.

  And the trend would only continue. At the start of 2014, Academy Awards host Ellen DeGeneres walked down the aisle of the Dolby Theatre in Hollywood with her phone out, taking a selfie with Liza Minelli and talking about it like a teenage Snapchatter. She stopped by Meryl Streep and said she wanted to pay homage to Streep’s record eighteen Oscar nominations by breaking the record for most retweeted picture ever. As she and Streep started crouching for a selfie, DeGeneres urged surrounding celebrities to join in. Julia Roberts, Channing Tatum, Bradley Cooper, Kevin Spacey, Angelina Jolie, Brad Pitt, Lupita Nyong’o, Jared Leto, and Jennifer Lawrence joined the picture, which millions of people retweeted.

  While the picture itself wasn’t taken on Snapchat, the influence of the selfie can certainly be directed back to the ephemeral messaging app. Mobile photography was already enormous thanks to smartphones, Facebook, Twitter, and Instagram. But Snapchat threw gasoline on the fire with the selfie and pushed us into taking so many pictures of others and ourselves that the cohost of the Oscars felt the need to take selfies mid-broadcast. Selfies had come a long way since Robert Cornelius’s 1839 self-portrait. You can take a selfie using any camera or app, but Snapchat was the app to do it with, becoming nearly synonymous with taking a selfie, the way Kleenex had become synonymous with all tissues.

  Snapchat was the belle of the ball. On New Year’s Day, the Stanford band formed the Ghostface Chillah logo on the field at halftime of the hundredth Rose Bowl Game.

  That New Year’s Eve was a beautiful evening of contradictions. A picture-sharing company throwing a party that confiscated your phones. Newly famous youngsters celebrating an iconic holiday out of the limelight. There was a sense of wonder, looking back, at how quickly and awesomely this product and company had been built. But a taste of bittersweet, looking forward: the team would never be this cool, small, and tight knit again. It’s very rare that you realize you are living in the “good old days” when they are happening; but that night, it was clear. This was a special period that would never be the same again. Snapchat was already huge; the world just didn’t know it yet.

  Part II

  TOYS ARE PRELUDES TO SERIOUS IDEAS

  CHAPTER SEVENTEEN

  HANGOVER

  JANUARY 2014

  VENICE, CA

  In August 2013, researchers at Gibson Security, a security research group, reverse-engineered part of Snapchat and found security holes that could allow malicious hackers access to usernames and phone numbers. They notified Snapchat, but the company did not respond.

  On December 25, 2013, Gibson Security published the code they had used to find security holes in Snapchat, hoping the public pressure would force Snapchat to patch the flaw. On December 27, 2013, Snapchat wrote a brief blog post, downplaying the significance of the security flaw: “Theoretically, if someone were able to upload a huge set of phone numbers … they could create a database of the results and match usernames to phone numbers that way.”

  On January 1, 2014, a different set of hackers used Gibson’s method to do just that, posting the phone numbers and matching usernames of over 4.6 million Snapchat users in an online database dubbed SnapchatDB. They published it to publicly pressure Snapchat to fix the flaw, telling the media that “security matters as much as user experience does.”

  On January 3, Evan was interviewed by Carson Daly on Today about the hack. “Technology businesses in general are susceptible to hacking, and that’s why you have to work really, really hard,” Evan said. “The key is striking a balance between providing [the] utility of a friend service and preventing abuse, and that is something we are always working on.… I believe at the time we thought we had done enough. But I think in a business like this and a business that is moving so quickly, if you spend your time looking backwards, you’re just going to kill yourself.”

  The media skewered Snapchat for the hack—and Evan for not apologizing to users who had their information stolen and published. Journalists believed Evan was far too cavalier about users’ privacy in refusing to patch the security hole, arguing that he was unfit to be CEO if he did not apologize to users. Evan and his team must have believe
d the flaw was not significant, but they could have patched it with very little effort. By choosing not to, they recklessly let millions of phone numbers and usernames, many of which are the same across various online accounts, become public.

  Later that day, widely read Fortune editor Dan Primack wrote a column titled “Does Snapchat’s CEO Need to Go?” in which he argued that either Evan should be fired or Evan should fire whoever was advising him not to apologize for what Primack called a “massive violation of user trust.” Primack continued:

  It’s about doing right by the millions of people who use the service, in large part, because it is designed to offer a more private social networking and sharing experience than do sites like Facebook or Twitter.

  The hack and public fiasco made Snapchat seem amateurish. Effectively zero users deleted Snapchat because of the breach, and it did not slow Snapchat’s wild user growth. But the breach did attract the attention of the Federal Trade Commission, which looked into the incident.

  In May, Snapchat agreed to settle charges with the FTC that snaps did not disappear the way they promised. The agency charged that Snapchat told users messages could not be saved, but users could easily use third party apps or technical workarounds to save snaps. The complaint also stated that Snapchat used location information and collected contacts from address books, despite telling users that it did not do that. And finally, the FTC noted that lax security policies led to the January 2014 SnapchatDB breach.

  Under the terms of the deal, Snapchat had to start a privacy program, agree not to misrepresent just how completely Snapchats disappear, and agree to be monitored for twenty years. While Snapchat did not have to pay any fines at the time, future privacy breaches could cost the company millions in penalties. Many tech companies, like Google and Facebook, have also entered into similar agreements with the FTC due to similar issues.

  As all of this was happening, Evan appeared on the cover of Forbes’s January “30 Under 30” issue. An accompanying article promising “The Inside Story of Snapchat” ran on January 6, just three days after Primack said that Evan should be fired for the hack and refusing to apologize. The article began with an anecdote about Mark Zuckerberg emailing Evan to meet and Evan brashly responding “I’m happy to meet you … if you come to me.”

  Business Insider reporter Alyson Shontell tweeted her summary of the story with a caption, “If you didn’t think Spiegel was arrogant before, his email to Mark Zuckerberg will convince you.” Evan took to Twitter and replied with screenshots of his emails with Zuckerberg, showing that while he hadn’t agreed to rush right up to Facebook, he hadn’t played it quite as brashly as the Forbes story portrayed:

  Hey Evan,

  I’m a big fan of what you’re doing with Snapchat. I’d love to meet you and hear your vision and how you’re thinking about it sometime. If you’re up for it, let me know and we can go for a walk around Facebook HQ one afternoon.

  Mark

  Thanks:) would be happy to meet—I’ll let you know when I make it up to the Bay Area

  Sent from my iPhone

  Sounds good. Do you have any trips planned for the rest of this year?

  Nothing planned—let’s shoot for something in the new year:)

  Are you guys based in LA? I’m going to be down there in a couple weeks so I might be able to stop by if you’re around then.

  Yep, we’re here. Let us know when you make it down—hopefully we can conjure up some good weather for you!

  Forbes editor Randall Lane was furious and quickly published a retort, “Snapchat’s Evan Spiegel and the Antics of a 23-Year-Old Novice,” in which he skewered Spiegel: “Bill Gates, Michael Dell and Mark Zuckerberg have proven that you can be in your early 20s and have the wisdom to run a transformative billion-dollar company. Snapchat CEO Evan Spiegel seems intent on proving the opposite.”

  Many at Snapchat felt the news coverage and media takes were overblown. But many outside the company felt Snapchat, and particularly Evan, were arrogant and needed to be taken down a notch. Evan was quickly learning that after brashly turning down Zuckerberg, Snapchat was going to be under the microscope in the coming year like never before.

  CHAPTER EIGHTEEN

  THE MORE PERSONAL COMPUTER

  FEBRUARY 2014

  VENICE, CA

  On February 19, 2014, Facebook shocked the world by spending $19 billion to acquire WhatsApp, the company behind its eponymous, free messaging app. It was one of the largest acquisitions in the tech industry’s history.

  The move both strengthened Facebook and seemed to shut the door on a possible future landing spot if Evan and Bobby did want to sell after all. Snapchat let users message their friends privately and share photos and videos with friends in a feed. Facebook had now spent $19 billion on a messaging company in WhatsApp and another billion on a feed-based social media company in Instagram. Would they want to shell out billions more on a photo-sharing/messaging company in Snapchat?

  On the day the deal was announced, WhatsApp cofounder Brian Acton spoke to Wired, making it clear that he both despised Snapchat and didn’t really seem to understand it:

  It’s not 100 percent clear to me what’s working about Snapchat. Great, teenagers can use it to get laid all day long. I don’t care. I’m 42, essentially married with a kid. I don’t give a shit about this. I’m not sexting with random strangers. I send the “I love you’s” in text. She’s sending me photos of our baby. These are memories. It’s not clear to me that being goofy with Snapchat necessarily creates that level of intimacy.

  Clearly Evan Spiegel only has his pulse on one part of the world. We have a whole wall of stories about people who got to know each other long distance and eventually got married. You’re not going to do this over Snapchat. And people want chat histories. They’re a permanent testimony of a relationship.

  There was no love lost on the Snapchat side of the war either. Bobby emailed Lynton and Evan about the acquisition, noting that it was a “pretty absurd price nonetheless, and indicative that FB is failing to innovate where it matters. WhatsApp is fairly uninteresting too except for their size.”

  Facing Instagram and WhatsApp united under the giant blue Facebook banners, Evan and Bobby would need to execute swiftly on a clarion vision. Instagram had a captive audience that overlapped significantly with Snapchat’s young, North America–centric core user base. WhatsApp was wildly popular in much of the rest of the world, where Snapchat would one day look for growth. The two popular apps, backed by the Facebook empire, were a formidable opponent.

  The manner in which Facebook decided WhatsApp’s value was equally worrying. In 2013, Facebook acquired a Tel Aviv–based mobile-analytics company called Onavo. Onavo made a free app called Onavo Protect that creates a virtual private network, or VPN, to encrypt internet traffic. Because Onavo Protect handled users’ internet traffic, it could create a log of users’ action on Facebook’s servers; Facebook’s product teams could then look at detailed information, like how frequently and for how long people are using specific apps, from this aggregated data. If apps didn’t encrypt their data, Facebook could see user behavior as granularly as the number of photos the average user likes per day.

  Apple and Google can monitor user activity in a similar way because they own the mobile platforms in iOS and Android. This is just one of the major advantages that comes with owning the platform, which is why Facebook and Amazon have both tried to make phones. With Onavo, Facebook managed to capture this data advantage without owning the operating system.

  From Onavo’s data, Facebook saw that WhatsApp was installed on 99 percent of Android phones in Spain; this unique data helped drive its aggressive pursuit of WhatsApp, and promised to inform its acquisitions and product strategy in the future.

  Having rejected Facebook’s enormous acquisition offer, Evan and Bobby were prepared to blaze their own path to an IPO, keeping Snapchat independent. Evan delivered a speech in January 2014 that showed his grand vision for Snapchat. First, he talke
d about how Steve Jobs tied man to machine with the creation of the iPhone, letting users bring computers with them wherever they go, tied uniquely to them by a phone number. He argued that this should be called “the more personal computer” era, rather than “post-personal computer” era. Then he unveiled his framework for Snapchat through which everything—acquisitions, new features, and revenue—was developed:

  Internet Everywhere means that our old conception of the world separated into an online and an offline space is no longer relevant. Traditional social media required that we live experiences in the offline world, record those experiences, and then post them online to recreate the experience and talk about it. For example, I go on vacation, take a bunch of pictures, come back home, pick the good ones, post them online, and talk about them with my friends.

  This traditional social media view of identity is actually quite radical: you are the sum of your published experience. Otherwise known as: pics or it didn’t happen.

  Or in the case of Instagram: beautiful pics or it didn’t happen AND you’re not cool.

  This notion of a profile made a lot of sense in the binary experience of online and offline. It was designed to recreate who I am online so that people could interact with me even if I wasn’t logged on at that particular moment.

  Snapchat relies on Internet Everywhere to provide a totally different experience.

  Snapchat says that we are not the sum of everything we have said or done or experienced or published—we are the result. We are who we are today, right now.

  We no longer have to capture the “real world” and recreate it online—we simply live and communicate at the same time.