by Randall Lane
That’s when fate, in the form of another fraternity brother, Reggie Brown, stepped into Spiegel’s room to discuss a photo he wished he hadn’t sent someone. The ensuing set of events makes The Social Network look like C-SPAN2.
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WHILE OWNERSHIP OF SNAPCHAT remains hotly disputed, all sides seem to agree on the genesis: Brown said something to the effect of “I wish there was an app to send disappearing photos.” Brown refused to speak to Forbes, citing pending litigation, but his side of the story comes through via numerous court documents, including a leaked deposition. According to Brown, Spiegel became “physically animated” and repeatedly called Brown’s remark “a million-dollar idea.” (Spiegel acknowledged he was excited, but won’t comment about the “million-dollar idea” line.) That night they set out to find a developer. Brown claimed two candidates declined; regardless, they settled on Murphy, who had just graduated.
The original roles were fairly defined: Murphy as CTO, Brown as CMO, Spiegel as CEO, honing the idea as part of a design class he was taking. The first iteration was a clunky website that required users to upload a photo and set a timer before sending. The eureka moment only came when the idea migrated to mobile. “At some point it was like, ‘Hey, there’s a camera on your phone,’” Spiegel said. “‘Wouldn’t that be easier?’ ”
The class culminated in a presentation to a panel of venture capitalists. Brown came up with a name for the app, Picaboo, and Murphy put in eighteen-hour days to get a working prototype. “The feedback was basically, ‘Hmmmm. Well, thank you for showing us your project,’” recalled Spiegel. One investor suggested he partner with Best Buy. Many wondered why anyone would want to send a disappearing photo.
The first version debuted in the iOS App Store on July 13, 2011 . . . to yawns. “The Instagram fairy tale”—the app had 25,000 downloads on the first day—“that was not us, unfortunately,” Murphy said. The team had worked around a potentially fatal flaw—the fact that recipients can take a screenshot, rendering a disappearing image permanent—by building in a notification if your picture has been captured, a potent social deterrent. Still, by the end of the summer Picaboo had only 127 users. Pathetic. Brown toyed with positioning the app as a sexting tool. (“Picaboo lets you and your boyfriend send photos for peeks and not keeps!” reads a draft of a press release he wrote.) Murphy’s parents implored him to get a real job. And Spiegel apparently began pushing to shake up the team. According to Brown’s deposition, he overheard Spiegel and Murphy plotting to replace him.
The breaking point came when equity was being finalized. A month later, Brown, back home in South Carolina, called his two partners and laid out his case. He wanted around 30 percent, according to Murphy’s deposition, and listed his contributions: the initial idea, the Picaboo name, and the now-famous ghost logo. Spiegel and Murphy countered that he didn’t deserve anywhere close to that. When Brown claimed that he had “directed [the] talents” of Spiegel and Murphy, Murphy remembered, an enraged Spiegel hung up. Spiegel and Murphy changed administrative passwords for the app and cut off contact except for a few tense e-mails about a pending patent. Brown was out, relegated to something of a Snapchat version of the Winklevoss twins or Eduardo Saverin. (Ironically, in their battle with Brown, Snapchat hired the legal team that pursued the Winklevoss claim against Facebook.)
Now a two-man operation, Picaboo changed its name to Snapchat after receiving a cease-and-desist letter from a photo-book company with the same name. “That was like the biggest blessing ever,” said Spiegel. But even as he and Murphy added photo caption capabilities, they seemed destined to replicate their Future Freshman experience: a technically competent product that virtually no one wanted. Spiegel returned to Stanford for his senior year; Murphy took a coding job at Revel Systems, an iPad point-of-sale company in San Francisco.
But that fall Snapchat began to exhibit a pulse. As user numbers approached 1,000, an odd pattern emerged: App usage peaked between 9:00 a.m. and 3:00 p.m.—school hours. Spiegel’s mother had told her niece about the app, and the niece’s Orange County high school had quickly embraced Snapchat on their school-distributed iPads, since Facebook was banned. It gave them all the ability to pass visual notes during class—except, even better, the evidence vanished. Usage doubled over the holidays as those students received new, faster iPhones, and users surged that December, to 2,241. By January, users numbered 20,000; by April, 100,000.
But with growth came server bills. While Spiegel helped cover some of them with money from his grandfather, Murphy had to fork over half his paycheck. As monthly expenses approached $5,000, the guys needed a bailout.
Lightspeed Venture Partners’ Jeremy Liew came to the rescue. His partner’s daughter relayed how Snapchat had become as popular as Instagram and Angry Birds at her Silicon Valley high school. But Spiegel and Murphy proved difficult to track down; their website had no contact information, and no one was listed on the company’s LinkedIn page. Liew finally did a “Whois” lookup to find the owner of the Web domain, linked the obscure LLC that it was registered under to Spiegel and eventually tracked him down via Facebook. “His profile picture was with Obama,” shrugged Spiegel. “So I thought he seemed legit.”
In April 2012, Lightspeed put in $485,000 at a valuation of $4.25 million. “That was the greatest feeling of all time,” said Spiegel. “There is nothing that will replace that.” On the day the money went through, he sat in a machine-shop class busily refreshing the Wells Fargo app on his iPhone. In a final homage to Zuckerberg, when the money appeared he walked up to the professor and dropped out of the class and Stanford, a few weeks from graduation.
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SNAPCHAT HAS MOVED THREE times since the initial investment, as the company grew, by early 2014, to a still-lean seventy employees. The latest offices, in a former art studio a block from the Venice boardwalk, are appropriately anonymous, with just a small ghost logo to identify it. Most of the development that has made it a viral sensation, however, took place in 2012, when the company was headquartered at Spiegel’s dad’s house. “He convinced us to drop out of Stanford and move down to L.A. over the course of a single conversation,” said Daniel Smith, who was hired along with Kravitz.
The team worked around the clock, sleeping where they worked. (Smith lived in Spiegel’s sister’s room, with enough girlish orange and pink polka dots, Spiegel remembers, “to give you an anxiety attack.”) “Bobby had a habit of pushing code changes and then going to sleep,” said Spiegel, who then found himself on debugging duty. “I’d wake up in the morning and go, ‘Oh my God!’” Added Murphy: “I still have nightmares about him stomping down the stairs.”
The arrangement proved oddly effective. Said Lightspeed’s Liew: “They can call bullshit on each other, which makes their ideas better.” What emerged was an app that, rather than a tool for the likes of Facebook, can potentially challenge it. By both luck and design, Snapchat addresses three red flags for Facebook. First, it’s more intimate and exclusive. Just as Facebook took the anonymous Internet and boiled it down to real people you knew, Snapchat narrows your world from Facebook “friends,” which range from long-forgotten schoolmates to nagging aunts, to your network of phone contacts. People, in other words, you actually talk to.
Second, it’s perceived as young and cool. Most teens can probably find a grandparent on Facebook. Snapchat’s mobile-first roots give it credibility with the app generation, who increasingly view PCs the way their parents viewed black-and-white televisions.
And in the age of Snowden, parental Facebook monitoring, and “revenge porn” (exes who publicly post nude pictures of former lovers), the self-destruction feature has become increasingly resonant. “This isn’t a silly little messaging app,” insisted Liew. “It allows people to revert back to a time when they never had to worry about self-censorship.”
An entire subindustry—so-called ephemeral, or temporary, social media—has emerged behin
d it. Besides Poke (which has largely faded), there’s Clipchat (a Snapchat/Twitter hybrid), Wickr (disappearing texts), and dozens of other apps pushing the boundaries of digital communication back toward what a telephone call used to be—a way to communicate with little risk it will come back to bite you.
All of them, however, are stuck chasing Spiegel and Murphy, who have evolved Snapchat into something fun and easy. (Though, in 2014, Snapchat agreed with federal regulators to stop overpromising, given several workarounds, that messages will surely disappear forever.) To view a snap, users hold a finger on their phone screens, a feature designed to make it still more difficult for people to photograph the image with another camera. Disappearing video is now an option. And while teens have embraced a medium unreachable by prying parents or future employers, grownups are catching on. All told, Snapchat users in early 2014 were sending 400 million photos and videos each day, matching the daily uploads to Facebook and Instagram combined.
“We certainly didn’t invest in this to flip it,” said Mitch Lasky, a Snapchat board member and partner at venture capital firm Benchmark Capital, which led Snapchat’s $13.5 million fundraising round in 2013 (they also raised $60 million from Institutional Venture Partners)—and invested in Twitter way back in 2009.
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AMID THE ASTOUNDING GROWTH, valuations, and talk of an independent future, one key ingredient is missing: revenue. Asia offers a possible blueprint. There, a handful of wildly popular mobile messaging services upsell users with in-app purchases. Spiegel’s party line, when discussing revenue, feels as if it’s read from a script: “In-app transactions followed by advertising, that’s the plan we’re sticking to.”
Drilling down through some of the companies that Spiegel cites raises more questions than answers. China’s WeChat, a massive messaging app owned by the Chinese Internet behemoth Tencent, encourages users to subscribe to celebrity greetings and to purchase physical goods. But it’s mostly a texting app, and the messages don’t disappear. Korea’s KakaoTalk and Japan’s Line make most of their money via mobile games, which don’t seem a natural fit with Snapchat. And, of course, digital goods, like premium sticker packages, emoticons, and animations, are also moneymakers in Asia, though Spiegel seems to disapprove. “It’ll make sense in a Snapchat way,” he said. “But it will not be stickers.”
Advertising is similarly tricky. Snapchat’s core strengths in gaining users (your privacy is protected and your images disappear!) cripple the targeted advertising that most social media companies rely on (Snapchat knows little more than e-mail, age, phone number—plus your ads disappear!).
But it has one advantage that virtually no other digital advertiser can claim: guaranteed engagement. Users must keep their fingers on a photo or video to view it—and that applies to any ads thrown their way. Snapchat can tell advertisers with absolute certainty whether their ads were viewed, a rare data point in the metric-driven world of digital advertising.
Like Facebook, the company can also charge businesses for setting up branded accounts. Acura, Taco Bell, and the New Orleans Saints have already used the app to debut new products and show behind-the-scenes footage. The company’s Stories feature, which lets users display a compilation of snaps taken over the last twenty-four hours, is useful for brands looking to tell a longer story. Example: Online retailer Karmaloop used the feature to show clips of posing models sprinkled with discount codes and new items. Others, like frozen yogurt chain 16 Handles, have experimented with “exploding coupons.”
Spiegel and Murphy, slow in their college days to adapt to emerging platforms, also seem keen to not make that mistake again. In September 2013, for example, Snapchat debuted on the Samsung Galaxy Gear smartwatch. “People haven’t thought about use cases on new computing platforms,” said Thomas Laffont, managing director of Coatue, the hedge fund that provided the latest $50 million infusion. “In one tap you take a photo, one more and you can share it. Imagine [the difficulty] trying to post on Instagram from a Google Glass device.”
Ah, Instagram. Zuckerberg’s Poke might be languishing, but he still has the last billion-dollar app to come out of Stanford. Kevin Systrom’s $1 billion sale in 2013, in fact, is often held up as the reason Snapchat was right to turn down Facebook’s preemptive billions. (Instagram would likely be worth as much as ten times more now.) Zuck is going after Snapchat again with a tweak to Instagram—Instagram Direct, a Snapchat knock-off with a key difference: The images don’t vanish unless users go in and delete them.
Spiegel and Murphy have another headache: Brown’s lawsuit, which asks for one-third of the company plus punitive damages. “It’s definitely over a billion dollars we’re seeking,” said Luan Tran, one of Brown’s three lawyers. Insiders say Snapchat is eager to try the case, but videos of depositions, presumably leaked by Brown’s team, show Spiegel and Murphy far more equivocal and forgetful than their opponent. “I’m just hoping it gets resolved so it doesn’t prove to be a distraction,” said Benchmark’s Lasky.
The proverbial “adults” have been brought in, including Philippe Browning, the vice president of monetization, nabbed from CBS, and COO Emily White, poached from the business division of, yes, Instagram. But, tellingly, the company prevented Forbes from interviewing either of them.
So for now the doubters carry the day. “There’s an almost ritual incantation when these things reach 50 million daily active users and people say, ‘Well they’re not making any revenue,’” said Lasky. “It’s unfair to expect these things to generate revenue while growing so quickly.” To his point, the same was said about Twitter and Facebook. But it was also intoned by the dot-com oracles on the eve of catastrophe fifteen years ago. Will Snapchat wilt like MySpace, get out at a peak valuation the way Mark Cuban sold Broadcast.com, or prove to be the next great social media IPO? We should get our answer by 2016, just in time for Spiegel to turn the ripe old age of twenty-five.
CHAPTER 14
Palmer Luckey, Oculus VR: Virtual Reality, Tangible Fortune
When Forbes magazine highlighted Palmer Luckey, a twenty-one-year-old video game tinkerer, on our annual “30 Under 30” list in January 2014, many readers chuckled. Barely old enough to drink, Luckey had a company with no revenues, not even a commercial product—just a prototype with a bizarre name, Oculus Rift. Less than three months later, however, no one was laughing. Mark Zuckerberg ponied up $2 billion in cash and stock to bring Oculus—or more specifically, Luckey’s virtual reality headset—into the Facebook fold. But what makes Luckey’s score so revolutionary isn’t his precocious age or even the potential that “the Rift” holds to change how we view the world. Instead, as David M. Ewalt deftly shows, it’s how he was able to create incredible value by enhancing the work of others, without paying them for it, and then crowdfund it through the wallets of others, without giving up any equity. The age of open-source entrepreneurship is upon us.
It’s dark and creepy in the cargo hold of the Sevastopol; something could be hiding in here, and I’d never know it. As I walk between the piles of crates, I stop and peek around every corner. A noise makes my heart skip a beat. I tell myself it was just dripping water.
I shouldn’t have been scared, since I knew this is just a video game—a demo of Alien: Isolation, an upcoming horror-adventure based on the decades-old movie. But I was also wearing a virtual reality headset called the Oculus Rift, and the Rift makes it real: The game filled my entire field of vision—when I turned my head to look around, the world moved with me. It felt like I was actually on a space station being stalked by one of those same creatures that stalked Sigourney Weaver. And that wasn’t a good feeling.
There was another sound, and I turned to see a heavy blast door slide open at the end of a corridor. Behind it, there was a crouching, bipedal form, the size of a large man, covered in a shiny black exoskeleton. I stared, frozen, as the alien rose, closed the gap between us, and wrapped its arms around my body. Its dripping mouth open
ed, and inner jaws plunged toward my face.
An involuntary squeal of panic emitted from my mouth. From behind me—this time in the real world—I heard a laugh. Palmer Luckey, the twenty-one-year-old creator of the Oculus Rift, had been watching as I played. “You got eaten?” he chortled. “You didn’t last very long.”
Luckey had been preparing for a game like this since he was a kid—which wasn’t that long ago. He started making virtual reality headsets when he was sixteen. At nineteen, he founded his company, Oculus VR. And now, finally old enough to drink, he sold this company for $2 billion to Facebook, despite the fact that his start-up had no revenue at the time, or even a commercial product. Instead, Zuckerberg ponied up that number, one as fantastical as the alien that had devoured me, for a simple reason: He believed that Luckey was on the verge of doing what generations of technologists before him tried and failed—bring virtual reality to the masses.
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THE PATH TO THIS new world began in the setting of so many modern success stories, which has almost become a cliché: a California garage. But Palmer Luckey wasn’t a striving Stanford graduate or dot-com refugee; he was an obsessed teenager, eldest of four children, the homeschooled son of a Long Beach car salesman and a stay-at-home mom, and he spent every spare minute with either video games (Chrono Trigger and GoldenEye 64 were among his favorites) or science fiction (particularly high-tech fantasies like The Matrix and The Lawnmower Man.) These passions both led him to the same place. “Virtual reality is in so much science fiction, across a wide variety of stories, that even if you’re not particularly interested in VR, if you’re a sci-fi enthusiast you end up learning a lot about it,” said Luckey. “That’s what happened. I grew up my whole life thinking virtual reality was very cool, and I thought that it must exist in secret military labs somewhere.”
