$3 billion? Pshhhhhh…

Let’s be honest with each other. We love Snapchat.

We love the app, the little ghost, the idea of disappearing – excuse me – ephemeral picture messaging, video snaps, stories, etc. We love it all. My evidence? The fairly ridiculous extent to which we use it. We share more pictures on Snapchat that on any other service, with Snapchat’s numbers having far eclipsed Instagram’s, and recently even overtaking those of Facebook. Which actually is pretty absurd when you think about it.

So when Snapchat turned down 3 billion from Facebook, it’s strange that we all freaked out to the extent that we did, right? At the very least, it’s strange how overwhelmingly people thought it was a bad idea. If we’re so on board with the product, one would expect a little more support for a fellow Stanford alum, eh?

My theory on why the internet flipped a communal shit is partly due to the extent to which Evan Spiegel so clearly understands today’s Silicon Valley. He knows it like he does the hallways of Stanford Kappa Sig, the rough streets of the Pacific Palisades, and the number of smudges (none) on the several pairs of white Vans I’ll assume he owns. He knows that the little thing that he and his buddy (or buddies, depending on whose lawyers you ask) came up with at school is fucking massive. Like Instagram who? massive. Like Ferraris before Series C massive. Like (much?) more than 3 billion measly dollars massive.

And he knows it’s only getting bigger as investors line up to pump their venture helium into his balloon while Mark Zuckerburg, Sergey Brin, Marissa Mayer, and co. daydream longingly about ways of slather it with a delicious coating of ads before it pops. 3 billion doesn’t quite seem big enough, so why not ride this out until we can visibly see sweat stains appear on the underarms of Zuck’s hoodie?

It’s become so clear that an acquisition is how baby Snapchat is going to grow up that its co-founders are literally dgaf-ing about revenue. On the Colbert Report, Bobby Murphy said that monetization could be in the “medium-to-long term future,” which means, well, very little other than it isn’t high on the list of priorities right now. Honestly, why bother? That will be the onus of the acquirer, much like it was for the Instagram, Tumblr, etc. deals. And from what we’ve seen thus far, the relative failure to monetize on these thus far hasn’t kept tech giants from whipping out their checkbooks, at least just yet.

It’s Snapchat’s casual and unapologetic manipulation of today’s marketplace which I think has made the general public uneasy. It’s hard to imagine that his company could be worth more than 3 billion dollars given the way we think about companies and define value, but given today’s climate it likely is actually worth more, if not much more. Very few people could have said no to that kind of money, but Evan’s move was both badass and potentially very well-calculated.

That’s why my problems are with the marketplace rather than with the company. The main one? Increasingly insane amounts of money are flowing into products and companies of increasingly inherent worthlessness. And for a certain sector of these companies, valuations are closer to price tags for Google, Facebook, etc. than accurate representations of monetary performance or potential. Basically, it pays a hell of a lot more to build free mobile products than much of anything else, especially with goal of getting snapped up by someone much bigger than yourself.

I’ll say now that the point I just made regarding value and worth, as well as everything after this point is highly subjective. That being said, let me delve into the specific issues I have with Snapchat’s inevitable road to acquisition:

The first is more out of principle than anything, and it has to do with the concept of a company and the purpose of growth investment (aka venture capital). A company, again, in my opinion, is an organization which produces goods in a way which would be sustainable and ideally scalable in the long term. The most common way to achieve this is the amassing of revenue and eventually profit, some of which is re-invested into the business to achieve growth. In the event that a company is not yet making profit (or revenue) and needs to stay afloat, it can be lent money from investors in the form of debt or equity. A debt investment is essentially a loan – something that needs to be paid back with interest – whereas equity is giving away a chunk of the company, which the investor hopes will appreciate over time. The latter is how VC’s make their money, with the way to cash out being some sort of liquidity event, namely acquisition or IPO. (Apologies to those who didn’t need VC 101)

Bootstrapping is no longer a thing. Way too old school.

However, this path to liquidity and long-term viability is pretty far from what a lot of today’s software (namely mobile) companies are going after, especially high profile ones such as Snapchat. These “companies” are the opposite of bootstrapped – juiced up with venture money without anything resembling a mature business plan while running at an indefinite loss. It’s tough to justify investment as “growth investment” when the money is not being used to expand – or even build – a core business. Which makes it difficult to call the organization getting funding a “company” to begin with as well.

Some of these “companies” don’t even sell anything, rendering them completely dependent on their venture backers. And many of their venture backers are becoming highly dependent on Facebook, Google, etc. as an acquisition is the only way to return an investment into a company which clearly can’t IPO or even operate independently on its own for too long, at a valuation which is probably too high to begin with.

While my first issue was largely due to semantics, it is this chain of dependencies which is truly worrisome due to the chain of financial dominoes it’s setting up. As long as Facebook, Google, Yahoo continue their cash-splashing ways, everyone goes home happy and rich. But if at some point they don’t, you’d have an entire generation of startups whose exit strategy becomes obsolete and VC’s whose chunk in the company looks much less valuable than the millions that they bought it for. And it’s hard to imagine that tech giants will be splurging for too much longer, given most are now public companies with millions of shareholders breathing down their neck instead of a few, highly strategic private ones. Given that this stock is also tied into 401k’s, endowments, and mutual funds in which people are pouring their savings, it’s easy to imagine that people will soon stop being down with billions of dollars being spent on products which execs aren’t completely sure how to monetize on, even a year or more after their being acquired. Not everyone is willing to keep taking on venture-type risk in the relatively risk averse climate of public equities, especially when that risk is being translated into life outside Silicon Valley.

With a bit more innovation and VC money, we may never have to look up from our phones ever again!

My final point is that even if things do go right, and the 3+ billion dollars of value that Snapchat represents is fully realized (and maybe magically without only ads!), making Evan Spiegel a bona-fide billionaire, it would be incentivizing our generation to keep trying to build the next Snapchat, Instagram, Facebook, etc. instead of, well, anything else. The desperation our generation has with being constantly distracted by our phones is fueling a not-so-subtle generation of companies – and entire industries – who are capitalizing on this and creating a pretty unfortunate positive feedback loop.

Call me old school, but it would be sweet if today’s innovators, namely Zuck, Mayer, and (this is truly, truly, truly painful) Spiegel were trying to fix the environment, traffic jams, burnt toast, poverty, stepping into dog poop, basically anything other than continuing to translate the analog (a fancy way to say “real”) world into the digital. I’m a victim of severe phone attachment as well, and I yearn for someone to come along and help me get the cramps out of my neck and thumbs and, in doing so, get me to log out and smell the roses again.

And if this imaginary person or product can slow the inflation of what is either a huge bubble, a continued transition to digital, ad-filled communication, or both, well that would be chill as well.

- James

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