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The Snapchat story

I recently read How to Turn Down a Billion Dollars, The Snapchat Story by Billy Gallagher. The book is fantastic and full of lessons. It’s well worth the read, but below are some of the passages we learned from.

Snapchat really started as a sexting app. “He wouldn’t have to worry about sending a hookup a picture of his junk! And girls would be way more likely to send him racy photos if they disappeared.”

The seed round is the easiest to raise. “But the descent from seed-funded startups to Series A and B is often much steeper than people expect. Raising some money for an idea is not that difficult. Staying in the game round after round, as the world changes and targets are met or not met, is extraordinarily difficult.”

Small investors don’t do much diligence. “Had any venture capital firm or person invested $30 million on their own, they would have gone through a rigorous due diligence process, vetting Clinkle’s team and technology inside and out. But none of the sixty-odd investors had a significant amount of money on the line. And so, there was no one with sole responsibility, let alone a board seat, when things started to go to hell for Clinkle.”

Too much cash killed Clinkle; it made them lazy. “Clinkle never came close to feeling this sort of pressure. This long runway, combined with their insistence on perfection, became toxic as they spun their wheels, creating many products that never saw the light of day.”

Stanford kids wanted to start any startup. “There was a shift at some point, from smart kids saying, “I want to solve X problem” to students going, “I want to start a startup. Now I just need a damn idea!”

The yellow logo. “Evan studied the hundred most popular apps in the app store and noticed that none had yellow logos. To make Picaboo stand out, he put the Ghostface Chillah logo on a bright yellow background.”

Cater to the power users. “Although it had less than a hundred users, most of whom were Evan and Bobby’s friends, the people who did use the app were using it all day, every day. Evan and Bobby knew Snapchat had value, because everyone who used the app used it all the time. They needed to get it into more people’s hands and make it grow, even if they had to force this growth at first.”

Why Snapchat works. “Teenagers also felt pressure to post the most glamourous representations of their lives on Facebook, Twitter, Instagram, and other social media sites to rack up likes. Even designed Snapchat as an antidote to this obsession with likes and retweets. Snapchat was not meant to be a social network — it was designed as a small, private network, to share with your closest friends. Snapchat had no lies, no permanence, no social anxiety.”

Snapchat removed the pressure of the perfect photo. “Because you could only reply with a photo, friends would send selfies of themselves reacting to photos. We talked through photos instead of posting them to garner likes. The cost of creating and sharing a photo dropped so much knowing that the photo would disappear. It wasn’t just that taking and sharing a photo was essentially free; sending a photo to a friend no longer had the importance it once did with testing. You were just exchanging lightweight photos that were meant to be discarded immediately.“

All the VC passed initially. “But the first venture capitalist who met with Evan, including blue chip firms like Sequoia Capital and Benchmark Partners, passed on the investment. Disappearing photos? It sounded like a sexting app at best, or a fad at worst.“

Until they saw the growth. “Snapchat had jumped from one thousand daily active users in late 2011 to one hundred thousand daily active users in April 2012. Just ten days after meeting Evan, Liew convinced his partners, and Lightspeed invested $485,000 in Snapchat, valuing the young company at $4.25 million. Snapchat grew by a factor of ten, from one hundred thousand daily active users to a million in just six months.”

Facebook tried to bully Snapchat into selling. “Evan explained that they weren’t just interested in selling the company. In response, Zuckerberg showed them something new that his team had been working on. Poke, a new Facebook app, would be released in a few days, What was it? A messaging app for disappearing photos and videos. The message was clear: join us, or we will crush you. It was an exact replica of Snapchat. An unabashed copy, Poke even stole Snapchat’s user interface for recording videos. This was a show of might from Zuckerberg and his team up north. Veteran Facebook director of product Blake Ross had led a small team in developing Poke in just twelve days.”

Zuck’s acquisition strategy. “If you’re trying to help convince people that they want to join you, helping them understand all the pain they would have to go through is a valuable tactic,” Mark Zuckerberg later said when asked about Facebook’s acquisition strategy. Now, he intended to show Evan and Snapchat the pain they would have to suffer to compete with Facebook.”

Copycats from bigger competitors often fail. “On the day it launched, Poke shop up to the top spot in the iOS app store, pushing Snapchat down to ninth. But just a week later, Poke had dropped to thirty-fourth, while Snapchat rose back up to third. Why did Poke fail? It failed to solve any problems for young users, who were more than happy with Snapchat, and it solved a problem that didn’t exist for older users, who still didn’t get the appeal of disappearing content. Poke was further hampered by the fact that teens were drawn to Snapchat because it explicitly was not Facebook, which was populated by their parents and collected everything they posted forever.”

Sometimes competitors inadvertently help you. “Within weeks it became clear that Poke hadn’t just failed — it actively helped Snapchat. Searches for and mentions of Snapchat skyrocketed in the weeks following Poke’s debut. More importantly, Zuckerberg’s flailing attempt at an acquisition and then clone validated the ephemeral messaging space and helped change the sexting narrative that had been dogging Snapchat. Evan would later call Poke “the greatest Christmas present we ever had.”

A new metric when things are going so well. “teenagers were so addicted to the app — opening it and sending and receiving snaps dozens of times per day — that the company started focusing on hourly active users.”

What Snapchat was about. “People wonder why their daughter is taking 10,000 photos a day,” Evan later said. “What they don’t realize is that she isn’t preserving images. She’s talking…It’s not about an accumulation of photos defining who you are. It’s about instant expression and who you are right now. Internet- connected photography is really a reinvention of the camera. And what it does is allow you to share your experience of the world while also seeing everyone else’s experience of the world, everywhere, all the time. By taking out the forever part of a picture or text, more people want to share. They aren’t afraid to put themselves out there, to send an ugly picture that may turn someone off or a beautiful picture that may seem narcissistic.”

Snacpchat wasn’t easy to use, which made it stickier and collaborative. “So teenagers would ask, “How did you do that?!” and show each other how to use new and hidden parts of the app.“

Turning on revenue too soon would have hurt the value. “Right now it’s all about users and growth and engagement, which we know will go up and to the right for a while. It’s going to take a while to come up with a cluster of monetization schemes that get you to the point where you won’t to be judged on revenue/earnings multiples. We have to assume there is no AdWords-like magic bullet. Lasky warned Evan that starting to generate revenue would change the lens through which investors evaluate Snapchat from user growth-focused to revenue-focused.”

Low options pricing helps recruiting. “We will benefit from having lower strike price as we hire over the next few years.”

Mobile really hurt the size of the ad business. “Noto explained that Facebook ad impressions had declined year over year but were offset by revenue per impression increasing. Ad impressions were declining because people were increasingly accessing Facebook on their smartphones, which had less space for ads than desktops.”

At some point, you cant be a startup. “In 2012, Snapchat had fewer than ten employees; in 2013 the number jumped to thirty. In 2014, it would soar past one hundred, and Evan and Bobby needed to put more structure in place.”

Design drives Snapchat. “Unlike at most tech companies, Engineers aren’t rock stars at Snapchat. The designers are. Evan, a product design major, ran the design team as a flat team of twenty until 2016, when they began reporting new VP of Product Tom Conrad.“

The impact on communication. “By not allowing users to message unless they were sending photos or videos, Snapchat had taught users to communicate through media rather than around it.”

Turn on revenue only when you must. “By 2014, Snapchat was burning over $100 million a year and Evan pushed harder to start monetizing the product. Revenue would let Snapchat invest more in future product development; but a bad revenue scheme would piss off users and could hurt both growth and engagement, so they had to be careful.”

Ad business isn’t growing. “Despite the wild changes in media formats over the past century, the amount of money spent on advertising has generally remained constant. In the advertising business, the only way to make money is to steal some else’s share of the pie. In the first quarter of 2016, a Morgan Stanley analyst estimated that for every new dollar spent on online advertising, 85 cents would go to either Google or Facebook.”

Snap achieved incredible scale. “In 2014, seventy-one million people were using the app daily; 40 percent of eighteen- to twenty-four-year-olds in the US with a smartphone used Snapchat.”

It’s ok to be expensive when you’re figuring things out. “Snapchat’s early ads were very basic and extremely costly compared to peers’ ad offerings — they charged advertisers hundreds of dollars for a very short spot, typically ten to thirty seconds. This was partially done on purpose to be prohibitively expensive and keep demand low, as Snapchat had a small team and was still building its infrastructure, both technically and organizationally.”

Snapchat provided validation for some. “Snapchat users loved sending in their submissions to Live Stories, hoping their snap got picked for the show; fans sent in almost sixty hours of content for each NFL game during the 2015 season.”

Good design. “Snapchat was cleverly designed so that it was easy for users to ignore features they didn’t like. Because of this, when Snapchat misses, they missed small. That is, misses didn’t cost them users. And when they hit, they hit big, with wild successes like Stories and Live.”

Focus. One of Evan’s role models, Steve Jobs, put it this way: “People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no the 1,000 things.”

Speed is critical. “As Evan understood with the camera opening and the speed of delivering snaps, speed is everything on mobile. Every millisecond users waited for content to load, they thought about switching apps.”

Early monetization efforts were not an instant success. “In early 2015, as Discover was just rolling out and snapchat advertising was still nascent, advertisers were struggling to put engaging content on the platform. Between 60 and 70 percent of viewers closed a Snapchat ad after three seconds of viewing it.”

Brand marketing done right. “They have slapped their eponymous logo — with no mention of Snapchat or any words at all — on the luggage bins at security at LAX and on massive billboards in Times Square. Many of the billboard panels in Times Square simply were covered in Snapchat yellow. People who knew what the logo means are in on the cool secret; those who don’t either ask or simply remain ignorant and uncool.”

Secrecy is valued at Snapchat. New hires are indoctrinated from day one to not talk about what they work on, even down to telling them not to put a specific role on their LinkedIn pages.

How a CEO spent his time. “Evan continued to be very aggressive in hiring, spending 40 percent of his time recruiting. (He devoted the rest of his time to product and attending meetings and events. 40 percent and 20 percent, respectively.)”

The Snapchat vesting schedule (Similar to Amazon). “Snapchat has also locked employees up by requiring nonlinear stock vesting, where employees get 10 percent of their stock options after their first year, an additional 20 percent after their second, 30 percent after their third, and the final 40 percent after their fourth year.”

Ads needed to be good content. “As frustrating as it was for advertisers, Evan was focused on what was best for Snapchat’s users. Rather than looking at advertising as a tax on using free products or necessary evil, he considered it as an other product and more content for users. Evan personally rejected ad campaigns that he didn’t like or that he thought users wouldn’t like; Kevin Systrom had done the same when Instagram launched ads.”

You have to be willing to cannibalize yourself. “Just before Facebook went public in 2012, Mark Zuckerberg had a bound red book titled Facebook Was Not Originally Created to Be a Company placed on every employee’s desk. The book’s penultimate page offered a grave rallying cry: If we don’t create the thing that kills Facebook, someone else will. “Embracing change” isn’t enough. It has to be hardwired into who we are that even talking about it seems redundant. The Internet is not a friendly place. Things that don’t stay relevant don’t even get the luxury of leaving ruins. They disappear.”

Visit us at blossomstreetventures.com and email us directly with Series A or B opportunities at sammy@blossomstreetventures.com. We invest $1mm to $1.5mm in growth rounds, inside rounds, small rounds, cap table restructurings, note clean outs, and other ‘special situations’ all over the US & Canada.