A promising young social network turns down an offer from one of Silicon Valley’s hottest companies, only to strike a richly valued deal with another tech behemoth whose best years are seen as behind it.
That was how Facebook came to accept a $240m investment from Microsoft in 2007 at what was then considered a jaw-dropping $15bn valuation, after rejecting advances from Google.
Now it is Facebook’s turn to be spurned by a hot young start-up, as its upcoming rival Snapchat nears an investment deal with Yahoo.
Like Microsoft in the mid-2000s, many in the tech industry see Yahoo as little more than a relic of the first dotcom era – not an obvious partner for the fast-rising chat app.
Nonetheless, after turning down a $3bn acquisition offer from Facebook last year, Evan Spiegel, Snapchat chief executive and co-founder, is close to securing tens of millions of dollars from Yahoo at a valuation of $10bn, according to people briefed on the discussions.
Microsoft’s investment in Facebook, which also included an advertising partnership, paid off handsomely: the social network’s market capitalisation now stands at $200bn.
But whereas Facebook made $150m in revenues in 2007, Snapchat’s heady valuation comes before it has even set out a clear plan to make money.
Yahoo is flush with cash from the initial public offering of Alibaba but struggling to turn round its core advertising business, despite a string of acquisitions and new talent brought in by Marissa Mayer in the two years since she became chief executive. Some investors are already pressing for a radical change in strategy.
Yahoo’s position in Snapchat will be far smaller than its initial 40 per cent stake in Alibaba, for which it paid $1bn in 2005. A meeting between Ms Mayer and Mr Spiegel at a conference this summer led to talks about what was initially to be a $50m investment and strategic partnership involving video distribution, but may now only total $20m, according to one person close to Snapchat. Neither Yahoo nor Snapchat commented on the investment, which has not yet closed.
A $10bn valuation puts Snapchat on a par with the likes of Airbnb and Dropbox, but it lacks those companies’ established income streams.
However, as it slowly courts investors, Snapchat has also been gently wooing the advertisers who may ultimately determine whether it can live up to its huge valuation.
Over the past year, Mr Spiegel has assembled a high-profile commercial team, including chief operating officer Emily White, poached from Facebook’s Instagram, and monetisation head Philippe Browning, who joined Snapchat from the mobile unit of CBS, the US broadcaster.
Ms White, also a former Google sales director, told Ad Week magazine in a recent interview that Snapchat was “certainly thinking about marketers” but remained in the “early days” of efforts to make money.
The initial focus of monetisation is likely to focus on its “Shared Stories” feature, in which Snapchat employees group together videos shared publicly by attendees at events such as this summer’s football World Cup final in Rio de Janeiro or this month’s Austin City Limits music festival in Texas.
This summer, Snapchat also created “stickers” with special logos that can be overlaid on individuals private photos from select locations, including Disneyland and Soulcycle gyms.
Brands such as McDonald’s, Manchester United and fashion site Nasty Gal already operate their own Snapchat accounts, hoping to tap the group’s young, 100m-strong user base. These are the very teenagers and 20-somethings that some have been worried are abandoning Facebook.
“For even our most traditional clients – car companies and the like – it’s all about this millennial audience,” says Angela Steele, chief executive at Ansible, Interpublic Group’s mobile agency. She attributes Snapchat’s appeal to its “trusted and relevant” platform that users check multiple times a day.
Snapchat’s messages may be ephemeral, but chat apps are “not fleeting phenomena”, says Tom Bedecarré, chairman of AKQA, a digital agency owned by WPP. “These are at a massive scale.”
Even as it lures professional ad makers, Snapchat is keen to retain the authentic, handmade feel of messages sent between friends. Ads must be specially tailored to Snapchat, or they will be “obnoxious to users”, says Ms Steele.
That is creating a new class of creatives skilled in crafting cool, 10-second messages.
Michael Platco is a former art teacher who has taken to Snapchat’s simple tools and colour palette, which he describes as like “finger-painting”. He started on Snapchat as a hobby but has now worked for brands including Disney and CBS, as well as advising many others on how to make the most of the ephemeral medium.
In his hands, a Heinz ketchup bottle becomes a cartoon monster and a trip to Disney World becomes extra animated.
Mr Platco says the medium “pulls on the heartstrings” because of this do-it-yourself quality and because the disappearing nature of the images commands someone’s full attention – if only for 10 seconds.
“What Snapchat demands of the user is they must stop whatever they are doing and fully, 100 per cent dedicate their attention to whatever it is their thumb is pressed down on,” he says. “That is a beautiful thing.”