Egg on Facebook

 | Nov 14, 2013 | 11:08 AM EST  | Comments
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The Twittersphere is shocked that Snapchat could have possibly turned down $3 billion in cash from Facebook (FB) recently for a buyout.

At that price, Snapchat is being offered double what YouTube accepted from Google (GOOG) to be bought out. Any buyout for $1 billion is a grand-slam home run for the venture-capital backers of any tech company. So what gives? Is it just hubris of 23-year-old founder Evan Spiegel at work here?

I don't think so. Snapchat and its backers were right to turn down the money.

The best reasoning for this case is Instagram accepting $1 billion a year ago from Facebook. At the time, it seemed like a wise choice by founder Kevin Systrom. After all, Instagram had no revenue, let alone profit. A billion dollars is a lot of money for a company with no revenue, right? Most people concluded this was a smart decision by Systrom.

Many thought it was a terrible choice by Instagram. The equivalent would be if Facebook had agreed to be bought by Yahoo! (YHOO) in 2006 for $1 billion.

Instagram, even back then, had the chance of growing into a special type of service. It was, and still is, extremely popular with young people. Because it doesn't look like Facebook (just photos, none of the high-school friend stuff) nobody (maybe even its founder, Systrom) ever thought Instagram could eventually replace Facebook.

But that's just what has happened since then. Instagram went from 30 million users in April 2008 before being bought to 150 million users at last count. That's not too far from Twitter's (TWTR) current 236 million count.

It's not crazy to assume that Instagram would be worth $15 billion today if it were to go public. That's still only about half of what Twitter is worth. Systrom left serious money on the table for 18 months of going it alone. And everyone else in the social media game sees that clearly.

There are a few special, independent, private companies out there. Snapchat is one. WhatsApp and Pinterest are others. Then you have companies like Kik and Line. Messaging is hot. User growth is spiking. Why should Snapchat accept $3 billion today when it might be worth $15 billion or more 18 months from now?

Critics say the same thing they said about Instagram: It doesn't make money or it could be a flash in the pan, and then what do you do? Many people will take the money and run.

But founders of these hot new services are starting to see the merits of sticking it out. And they can thank Mark Zuckerberg for showing them the way, both by how he steered Facebook and by how much money he made off the back of Instagram.

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