Virtuzone startup series: The Snapchat story by the numbers

January 17, 2016

It’s been four years and nine months since Snapchat co-founder Evan Spiegel floated the idea of an impermanent photo sharing app as part of his product design class project at Stanford University – apparently to the bemusement of many of his classmates. Today he is the youngest billionaire in the world (age 25).

Funny how things change. When I was in school those “projects” took on a slightly different meaning. Let’s just say there was not much chance of turning one of them into a company that would in just a few years have a valuation greater than the annual GDP of a small country.

But such is the world of digital tech startups. They have the ability to ramp up users so incredibly quickly, building audiences that advertisers are willing to spend a lot of money on. Today Spiegel’s global photo-sharing phenomenon, valued at over $16 billion on the private markets, is the fastest growing social network, and has 200 million monthly active users (MAUs in geek speak) who share over seven billion photos and videos – or “snaps” as they’re known – each and every day.

The Virtuzone startup series articles take a look at how some of today’s most successful startups got through their first few years, with a look at both the good and the bad times. And indeed it has not all been smooth sailing for Snapchat, with lawsuits, aggressive rivals, and security breaches, to name just a few of the rather massive headaches they have had to deal with. So as Snapchat approaches its fifth birthday, let’s take a quick look back at the trials and tribulations of its first years.

Snapchat is currently the fastest growing social network, with 200 million monthly active users.

An idea is born

The founders of Snapchat, Spiegel and Bobby Murphy (today CTO of Snapchat), first met back in 2008 during their college days at Stanford University in Palo Alto, California. They quickly put their entrepreneurial spirit on display, launching Future Freshmen – an online tool to help students navigate the college admissions process – which debuted in the summer of 2010. The rich-in-features site, according to Spiegel, did not take off: “We got, like, maybe five people on the service,” he told Forbes.

Now somewhere along the line the two came up with Snapchat. But it can be said that Snapchat’s origins are somewhat blurry, with the exact details of where the idea actually came from being the big issue – and the subject of much legal dispute (but more on that later). The story goes something like this: Fellow Stanford student Reginald Brown (originally CMO at the company) ignited the Snapchat spark by casually exclaiming: “I wish these photos I am sending this girl would disappear.” Spiegel and Murphy apparently then had a eureka moment, with the latter referring to it as “a million dollar idea” (turns out his guess was on the low side by three zeros). That eureka moment led to the creation of Picaboo, and in the summer of 2011 the first “impermanent” photo sharing platform was born.

Tough beginnings

You’d think by the first month’s results there would be nothing to get too excited about: Picaboo had a measly 127 users! Believing in the idea but dealing with the reality of it not going anywhere, there was a bit of desperation as the trio considered their next steps. Brown, still in the picture at this time, floated the idea of marketing the service as a “sexting tool”, to which Spiegel apparently responded by looking to make a clear cut. And so at this very early stage – just a few months after launch – he began discussions with Murphy to get Brown out of the picture.

Tensions came to a head in August, when in a heated phone call with Spiegel and Murphy, Brown demanded 30% of the company – citing the fact that he came up with the original idea, the name and the ghost logo. Spiegel and Murphy said no way, and during a heated argument, it is alleged Spiegel hung up the telephone, changed all the company’s administrative passwords, and cut-off all contact with Brown, effectively shutting him out of what no one at the time knew would become a billion dollar baby.

The Snapchat we know today

Now a two-man enterprise, Spiegel and Murphy set out hard at work initiating a number of changes that would be the start of the journey to morph the fledgling app into a super-rich tool that everyone had to have. And there was another big change in addition to all those new futures, this one initiated by a cease and desist letter from a California-based image publishing and printing service named Picaboo. In other words, Spiegel and Murphy were being forced to change the company name (later referred to by Spiegel as “the biggest blessing ever”), and so they arrived, of course, at Snapchat.

Throughout all this, the two were busy with other responsibilities – including completing studies and earning a living. As Spiegel returned to Stanford to finish up his senior year, the older Murphy took a coding job. Essentially, the two entrepreneurs were forced to get on with life while waiting to see how the new iteration of the app would be received.

But they would not have to wait long. By the fall of 2011 something started to stick, with user numbers closing in on 1,000. More interestingly, a pattern was spotted: app usage was peaking during school hours, meaning they were hitting with one of the most important demographics when it comes to apps – those coveted millennials. In the months that followed, usage continued to surge, from around 2,000 in December to 20,000 in January of 2012.

By April there were 100,000 people using the app, and Spiegel and Murphy were no doubt starting to daydream about becoming the next twenty-something tech billionaires on the block.

Once the ball starts rolling

As usage continued to increase, so too did the costs of running such an enterprise. With one still a student and the other barely getting his feet wet in the corporate world, money for this yet-to-be-monetised app was scarce. But alas, that’s a rather easy problem to solve when you can walk into any Silicon Valley venture capital office and present a picture of a solid user base that – much more importantly – was growing real fast.

But there would in fact be no need to knock on those VC doors, because the first substantial Snapchat investor actually sought the pair out. Having heard that the most popular apps in his daughter’s school were Angry Birds, Instagram and Snapchat, Lightspeed Venture Partners investor Jeremy Liew zoned in on the photo sharing app idea and offered up $485,000 – putting a valuation on the young Snapchat of $4.25 million.

The investment was to be the real game changer, and the catalyst that pushed the pair onto the next level. In fact, on the day the investment was scheduled to land, Spiegel was nervously sitting in class refreshing the banking app on his phone. The story goes that one of those “refreshes” showed an account top up of the almost half-million dollar investment, which led Spiegel to go straight to his professor and drop out of Stanford on the spot (just shy of graduation).

Having heard that Snapchat was one of the most popular apps in his daughter’s school, Lightspeed Venture Partners Jeremy Liew offered up $485,000 in investment.

It wouldn’t take too long for the choice to reveal itself as the right one. By October of 2012 the app’s user base had surpassed the 10 million mark, and images were being shared at a rate of 231 per second. It was perhaps unsurprising then that in December of the same year Benchmark Capital – one of the early funders of Instagram – came calling, plunging over $10 million into the enterprise, putting the value of an app that was only in its second year at around $70 million.

Rattling the major players

It wasn’t too long into 2013 that the Snapchat founders received a visit from the tech startup legend of the day, Mark Zuckerberg. The Facebook impresario – spotting both opportunity and threat – invited Spiegel for a feeling out meeting. Spiegel, a bit of a political player, responded that he was happy to meet up, but Zuckerberg would have to come to him – which Zuckerberg agreed to.

What happened during the meeting was perhaps a bit curious. Instead of making an offer to buy Snapchat (as perhaps many might have expected), Zuckerberg began telling Spiegel about plans for Facebook’s new product, Poke, a mobile app designed for sharing photos which, you guessed it, subsequently disappear. Zuckerberg told the pair that it was to be a major push for Facebook, so much so that he intended to change the signage outside Facebook headquarters from its current thumbs up to the new logo for Poke. What exactly was going on here? Spiegel put it as follows: Zuckerberg essentially came by to tell us that Facebook was “going to crush you”.

The art of war

Far from being deterred by what appeared to be an apocalyptic threat from the Godfather of the social networks, Spiegel and Murphy were more determined than ever to win what they now saw as a battle. They even went so far as to buy every Snapchat employee a copy of Sun Tzu’s “The Art of War”.

And Zuckerberg kept up the pressure – or shall we say continued taunting the pair. On the day Poke launched in the app store, he emailed Spiegel telling him he hoped he enjoyed Facebook’s new service. It was Snapchat who would have the last laugh in this particular tête-à-tête, however, because while Poke debuted at number one in the app store, it would be nothing more than a case of everyone wanting to check out the new product.

In other words, Facebook’s product left users cold, and within three days Snapchat’s app had pulled ahead, and Poke disappeared from the top 30 entirely. Eventually, Poke would fizzle and die (and Zuckerberg would later go on to say that Facebook launched the service as more of “a joke” than a competing product).

From this point on, there were simply no viable contenders, and Snapchat would start to reap the rewards that come from having a monopoly over something – in this case the “impermanent” photo sharing platform industry.

But there would be another issue to address around this time. Call it a “loose end.” As those user numbers and company valuation continued to soar, Brown, the man who was the apparent trigger of the Snapchat idea in the first place, launched the lawsuit that everyone knew was coming. It was a good time to do so. It was February 2013, and there were over 60 million snaps carried out each day (700 snaps per second). Just two months later, snaps were at 150 million per day. The billion dollar valuation of Snapchat was almost upon us. It was time to get serious.

Facebook comes calling again

June 2013 saw another round of investment totalling $80 million, valuing the startup at around $800 million just two years after launch. Facebook once more seemed keen on trying something to rival Snapchat, this time allowing users to send Instagrams via Facebook Messenger, a move that many saw as an attempt to once again compete directly with Snapchat in the image sharing space.

Snapchat was by this time far too busy to pay much attention. By September of the same year the app’s users were sharing over 350 million photographs per day – that’s around 4,000 per second – and Spiegel announced the first major change to the way images are shared. This saw the arrival of the popular Snapchat Story, where users could build chains of images in order to detail a series of events. Those images could then be viewed an unlimited number of times over a 24-hour period.

And to cap off the monumental year, Zuckerberg came into the picture once again, this time revealing what was perhaps his goal all along – to purchase Snapchat. But in a move that shocked and excited the business world in equal measure, the two former Stanford University classmates said thanks but no thanks – to Zuckerberg’s $3 billion offer.

Overcoming security troubles

The years 2014 and 2015 were to hold mixed fortunes for Snapchat. While the app saw record user numbers, as well as the owners having settled their long-running legal dispute with co-founder Brown (for an undisclosed sum rumoured to be in the hundreds of millions of dollars), they were also beset by high-profile security breaches.

One of these included a security flaw in the app’s Find Friends feature, which resulted in the leaking of over four million usernames and phone numbers – a massive PR nightmare if there ever was one. Spiegel was however praised for his quick response to the hack, ensuring users that security will be substantially improved and offering them the option to opt out of the Find Friends feature altogether.

And it would prove to be nothing but a tiny bump in the road. Snapchat continued to raise money at will for its expansion, and in 2014 it secured $480 million from 23 separate investors, which would put the company’s valuation at $10 billion. While many considered such a price tag to be just one big joke, others felt it was on the mark, as the app at the time had close to 100 million daily active users sending snaps at a rate of several hundred million per day. The advertising revenue potential was, for the believers, all too clear.

By 2015 Snapchat was already getting creative with the revenue models. Among other revenue-generating ideas, it introduced the Discover feature – which was a daily feed comprising content from brands including ESPN, CNN, VICE, Warner Music, National Geographic, and Yahoo! – that delivered paid content directly to its users.

2016 and beyond

At last count Snapchat boasts over 200 million registered users who share around 20,000 images per second. With those kinds of numbers and still solid growth, it’s easy for Spiegel to take a page from Zuckerberg’s book and very gradually monetise (as opposed to feeling pressure to bring in as much revenue as possible at the expense of the user experience).

It’s definitely a company to watch. Will it continue it’s incredible run, or will it go the route of Twitter, which at its highest had a valuation of almost $50 billion, but as of this writing is valued at just under $13 billion, and desperately looking to find its way?

There has in fact been much speculation over the years about the true value of Snapchat, and late last year Fidelity, a fund with a sizeable investment in the company, quietly marked down the value of its stake, suggesting Snapchat no longer has a valuation of $16 billion, but rather $12 billion. Regardless of whether we are dealing in billions or thousands, it’s still a 25% haircut, which is a lot off the top.

So let’s see. It’s paper money at this stage and a lot still has to play out to see what sort of future this company has. It could go the way of the greats and establish a real foothold that offers long-term value to investors, or it could become (or remain) too much of a niche play to offer that long-term value.

 

Neil Petch Author Image

About the author
Neil Petch; Chairman at Virtugroup
With a history of business successes, Neil Petch is well known in the UAE and beyond as a visionary entrepreneur with a passion for helping others establish and grow their own businesses. Neil founded Virtuzone in 2009 and quickly established it as the region’s leading company formation expert, before launching Virtugroup, a holding company that has a wider mandate of supporting startups from establishment; to successful market entry; and all the way through to exit.