How to Turn Down a Billion Dollars

by Billy Gallagher

  Snapchat’s server costs continued to soar, so Evan considered raising more funding. Other members of General Catalyst’s team quickly got involved, including partners Hemant Taneja, Joel Cutler, and Jon Teo. Teo met with Evan next, listening as he railed against Facebook’s stale, boring product and described how he wanted to make talking with friends feel light and fun again. Returning to his office, Teo searched for people tweeting about Snapchat and came across a teen girl tweeting about how it was finally OK for her to take an ugly photo of herself.

  Teo offered Evan and Snapchat a term sheet to invest $2 to $3 million, valuing Snapchat at $22 million. A term sheet is essentially a promise between a venture capitalist and entrepreneur that agrees upon the price and stipulations of an investment. As they were discussing the deal, Evan told him, “I’m gonna make you a ton of money.” After agreeing to the deal in principle, Spiegel and Teo started digging into the specifics, and hit a big roadblock.

  When Jeremy Liew and Lightspeed had invested just a few weeks prior, Liew had included terms giving Lightspeed the right of first refusal to invest in Snapchat’s next round of funding, as well as rights to take 50 percent of the next round. Essentially, Lightspeed controlled Snapchat’s next round of funding and made Snapchat unattractive to other investors, who would want to take a larger stake in the Series A round. Evan was furious. He felt betrayed and taken advantage of. Liew had told him these terms were standard. Evan would warn other students about this betrayal for years to come, as he did in a keynote address at a Stanford Women in Business conference in 2013:

  One of my biggest mistakes as an entrepreneur involved a term sheet. This particular term sheet was our first. And when we talked to the venture capitalists, and we talked to our lawyers, they took refuge in the notion of Standard. When I asked a question because I didn’t understand something, I was reassured that the term was standard, and therefore agreeable. I forgot that the idea of STANDARD is a construct. It simply does not exist.

  So rather than attempt to further understand the document, I accepted it. It wasn’t until a bit later, when the company had grown and we needed more capital—that I realized I had made a very expensive mistake.

  He also warned in a 2015 talk at the University of Southern California, “If you hear the words ‘standard terms,’ then figure out actually what the terms are, because they are probably not standard and the person explaining [them] to you probably doesn’t know how they work.”

  Teo and General Catalyst put Evan in touch with lawyers who would help him escape the blocking structure with a new round of funding. Evan struck a deal with Jeremy Liew to sell Lightspeed a limited number of Snapchat shares at a discount in exchange for removing the onerous terms. Feeling stung by Silicon Valley venture capitalists, Evan then put the deal with General Catalyst on hold and put together a group of angel investors from Los Angeles, including his father, John Spiegel, and the CEO of Sony Entertainment, Michael Lynton.

  Lynton’s wife Jamie had noticed that their two older daughters were addicted to Snapchat. Like Evan, their children attended Crossroads, and Jamie recalled that some of her daughters’ friends had their reputations hurt by things they’d posted online. Jamie Lynton, a major fundraiser for President Obama, invited Evan to their house for dinner. Within an hour, Evan was at the Lyntons’ home in Brentwood, which neighbored Pacific Palisades. As Evan shared his vision for Snapchat and an impermanent internet, Jamie and Michael Lynton became more and more impressed. They soon became close, and Evan would frequently lean on Michael for advice and rely on him for introductions to major players in the entertainment world.

  Michael Lynton would join the board of directors a year later. After graduating from Harvard with a degree in history and literature, Lynton worked in finance at Credit Suisse First Boston in the 1980s before earning an MBA at Harvard Business School. He worked at Disney, running Disney Publishing and Hollywood Pictures, before joining Time Warner as CEO of AOL Europe. In 2004, he took over Sony Pictures.

  With the fresh influx of capital and an active, growing user base, Evan and Bobby needed to grow their team, particularly in engineering. Evan wanted the best and brightest from his class to join them, so he went in search of students who had been vetted by the computer science department to be teaching assistants. He knew that these students had already been screened to be very high performing and able to work on teams.

  Evan met Daniel Smith during their freshman year when they were both in the same introductory product design seminar. The two became fast collaborators, working on countless product design projects together. It helped that Smith, who double majored in art practice and computer science, shared Evan’s passion for music and photography—he played acoustic guitar and was an avid photographer, even developing his own pictures.

  David Kravitz and Evan met during their senior year, when a mutual friend introduced them. As a teaching assistant for several computer science classes, Kravitz was popular among his students; he was friendly and easy to talk to, whether it was about hard, technical problems or life in general.

  In a single conversation, Evan convinced Smith and Kravitz to drop out of Stanford and move down to his dad’s house in Pacific Palisades to work on a disappearing photo app popular with teenagers. With Smith and Kravitz joining Bobby on the coding end, Evan was confident they would have the technical horsepower they needed. But they needed help in other areas, too. The users would need support when they lost their passwords or whatever else they messed up. And they eventually would have to grow Snapchat into a real company, with offices and structure.

  Dena Gallucci, an extroverted junior from one of the sororities that Evan frequently hung out with, had worked with Evan and Bobby on Future Freshman during its brief run. She had proved herself to Evan as a hard worker, even on the menial tasks like data entry for college information. They got along well, and, most importantly, Evan knew he could trust her. He hired Dena to be the community manager for Snapchat.

  On June 17, 2012, robed students, faculty, parents, and friends gathered in Stanford Stadium for the school’s commencement ceremony. Reggie Brown filed into the stadium, set to receive his English degree. Evan’s friends from Donner and Kappa Sigma and product design classes walked in and waved to smiling friends and family. While Evan wasn’t graduating, he chose to walk for the ceremony and receive a blank diploma rather than skip the celebration where all his friends were. After all, he was never really there for the grades anyway. It was a strange final act of conformity for Evan before fully departing Stanford and returning south to Los Angeles to build Snapchat. Three years later, Evan delivered a commencement address at USC’s Marshall School of Business, reflecting on how he later regretted walking:

  It only recently occurred to me, while preparing this address, how totally absurd this whole charade was. It reminded me that oftentimes we do all sorts of silly things to avoid appearing different. Conforming happens so naturally that we can forget how powerful it is—we want to be accepted by our peers—we want to be a part of the group. It’s in our biology. But the things that make us human are those times we listen to the whispers of our soul and allow ourselves to be pulled in another direction.

  CHAPTER TEN

  A NOT-SO-INNOCENT TOY

  JULY 2012

  STARTUP HAU5

  John Spiegel’s dining room had once again been transformed into a startup headquarters. Evan and Bobby were joined this time by new hires fresh from Stanford, David Kravitz, Daniel Smith, and Dena Gallucci. The group sat around the dining room table, charting a course for Snapchat’s product improvements. With laptops, notepads, and drinks covering the table and wireframes1 taped up on the walls and windows, they discussed their two main goals for the summer: make the app run more smoothly and crash less and build an Android version. It had only been a year since Picaboo launched in the App Store. When Facebook was one year old, there was no News Feed, no tagging, and no Like button. Likewise, there was much ahead on Snapchat’s product roadma
p.

  Evan, Bobby, David, and Daniel lived in the Spiegel house in Pacific Palisades. Daniel got the short straw and lived in Evan’s sister’s room, which was covered in orange and pink polka dots. Bobby would often push changes to the app’s code late at night before going to sleep, causing the others to wake up in the morning in a panic as they checked for bugs. Bonatsos and the other General Catalyst Partners would stop by the house to give advice and feedback on product development and take Evan and Bobby out for dinner.

  More than ten thousand people—primarily teenagers and twentysomethings—were downloading and joining Snapchat every day that summer. Snapchat grew by a factor of ten, from one hundred thousand daily active users to a million in just six months. While the front-facing camera on smartphones helped Snapchat gain early traction, smartphones’ address books may have done even more to drive viral growth. Before smartphones were ubiquitous, Facebook (and others) had to work extremely hard to build a social graph on the web. But with smartphones, people had a computer in their pockets with a complete social graph—their address book. This allowed Snapchat, Instagram, WhatsApp, and others to quickly build enormously valuable services.

  Snapchat’s existing users were also sharing more and more photos. This put a heavy strain on Snapchat’s infrastructure, as they had to deliver millions of photographs in real time. Because users saw Snapchat as a texting replacement, they expected messages to be sent and received within seconds; if Snapchat failed to do this too often, Snapchatters would abandon it, which could cause the app to start bleeding users and spin into a death spiral. This famously happened to early social network Friendster: the website was regularly down, and people jumped ship to Myspace and then eventually Facebook.

  The team also needed to develop an Android version of the app. Unlike iOS, which only has a few different screen sizes for various iPhones, Android has been developed across thousands of devices with varying screen sizes. So when they first completed an Android build and tested it on different devices, they found many phones were putting black bars at the top and bottom of the screen for picture previews, which made Snapchat look weird and ugly. It took them over six weeks to rebuild the camera function for Android to get rid of the black bars. All the while, Snapchat wasn’t available on Android, limiting its growth to iPhone users.

  Finally, Snapchat launched an Android version of the app on October 29, 2012; I covered the launch for TechCrunch. Evan and I spoke about the technical difficulties behind the Android development and how users had sent over a billion images through Snapchat since it had launched. But most interesting were his comments when I brought up the possibility of selling the company: “There’s no way I’m going to work for anybody else,” Evan said. “I don’t think you’re going to see us selling any time soon.”

  Evan wasn’t interested in a quick payday or a steady job at a big tech company. And Mark Zuckerberg would soon give him good reason to rule out working at Facebook. But most of all, Evan wanted to be a founder and a CEO—the captain of his own company that he could grow to be the next Apple. Evan’s attitude and Snapchat’s traction made the company’s next fundraising, a Series A round, the hottest deal on Sand Hill Road. There were plenty of questions surrounding Snapchat: Is this really a full-fledged company or just a feature that Facebook, Apple, Google, or someone else can copy? Isn’t every other company in the Valley moving toward collecting more data, not zero data? How will they make money? And, of course, isn’t this for sexting?

  But the other side of the fear/greed coin was even more compelling: teenagers were using this app with a frequency investors hadn’t seen since Instagram or Facebook. An early investment in a breakout company like that could return billions to a venture capital firm, making the partners personally wealthy and professionally respected. General Catalyst was still keen on doing the A round as the “lead” investor, meaning they would put the majority of the money in, receive a large ownership stake (typically 15 to 20 percent of the company), and would likely receive a seat on the company’s board of directors. But they had stiff competition from the best venture capital firms in the world.

  On a Monday night in October, Evan was as a guest speaker in a class Niko Bonatsos, the venture capitalist who had been persuing Evan and Snapchat since March, was running at Stanford’s entrepreneurship-themed dorm. During his speech he again suggested to the students that if a venture capitalist offered “standard” terms, they should in turn offer merely standard performance. Afterward, he went to dinner with General Catalyst’s contingent (Bonatsos, Jon Teo, Hemant Taneja, and Joel Cutler) at the Dutch Goose, a dive bar and burger joint in Menlo Park that is as popular with venture capitalists as it was with Stanford frat guys.

  The evening went so well that the General Catalyst group left the Dutch Goose thinking they had won the deal. But the next morning, Evan called and told them he was going with Benchmark as the lead investor. Several partners from Benchmark, primarily Peter Fenton and Matt Cohler, had maintained a relationship with Evan and Snapchat since they passed on the seed round the previous winter. They introduced Spiegel to Benchmark partner Mitch Lasky, who lived in Los Angeles, unlike most of the Bay Area venture capitalists vying for the deal. Benchmark invested $13.5 million in Snapchat, valuing Evan and Bobby’s nascent company at over $70 million.

  Some readers may wonder if there was any backlash or resentment to Snapchat choosing Benchmark over General Catalyst for their Series A round. Even the very best firms get turned down by entrepreneurs sometimes; if they’re smart, like General Catalyst was, they seek to maintain a relationship with the founder and try to invest in the company’s next round.

  As part of the deal, Lasky joined Evan and Bobby on Snapchat’s board, which would soon also include Sony’s Michael Lynton. Like Lynton, Lasky had as many, if not more, ties to the entertainment industry as he did to the tech industry. After earning a BA in history and literature at Harvard in 1984, Lasky went to law school at the University of Virginia. He briefly practiced law before joining Disney and video game publisher Activision. He then joined mobile gaming company JAMDAT as CEO, taking the company public in 2004 and then guiding it to a $680 million acquisition from Electronic Arts. In 2007, he started investing, primarily in gaming companies, as a partner at Benchmark. Evan, ever the showman, wanted to align Snapchat much more closely with Los Angeles, Hollywood, and entertainment than with Silicon Valley and its nerdy tech culture.

  Evan was very intentional about building Snapchat in Los Angeles; he loved growing up there and didn’t feel like the usual suspects in Silicon Valley understood the real world and real users, and thus weren’t good at building products that delighted consumers (with a few notable exceptions, particularly Apple). Once the company had outgrown his dad’s house in Pacific Palisades, Evan decided to move Snapchat to Venice, a funky beachfront town in western LA just south of his hometown Pacific Palisades and Santa Monica, where he attended Crossroads. Evan, Bobby, David, Daniel, and Dena moved the company into a low-slung powder blue bungalow on the beach in Venice; the new office featured a big yellow Ghostface Chillah out front.

  In 1891, a real estate developer named Abbot Kinney and his partner bought and developed a 1.5-mile tract of land on the beach in Santa Monica and put in a pier, horse-racing track, golf course, and boardwalk. Kinney’s partner died shortly thereafter, and Kinney did not get along with his partner’s successors, so they agreed to divide the land—Kinney won a coin flip and chose the marshy southern half of land. He built several miles of canals to drain the marshes and filled them with gondolas and gondoliers from Venice, Italy. He called it Venice of America.

  It quickly became a major tourist attraction, with three piers full of amusements and paid aviators performing aerial stunts over the beach. Following Kinney’s death in 1920, Venice fell into disrepair, as a fire to one of the piers and Prohibition crippled the town’s tax revenue. By 1926, Venice was annexed to Los Angeles. The city felt the town needed more streets and paved over many canals.<
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  The city subsequently fell into neglect, and by the 1950s it was referred to as the “Slum by the Sea.” But the low rent and beach would attract young counterculture artists, actors, poets, and writers. In 1965, Ray Manzarek and Jim Morrison founded The Doors in Venice; in 1980, another rock band—Jane’s Addiction—got their start in Venice. In the 1990s, the town was overrun by gang violence, but it has been significantly gentrified in the time since then—so much so that in 2012, GQ named its central road, Abbot Kinney Boulevard, “the Coolest Block in America.”

  Venice has always attracted an interesting mix of creative types. A few blocks from Snapchat’s bungalow office sat the Binoculars Building, designed by Frank Gehry, which features a massive, eponymous pair of binoculars over the entrance. It now serves as Google’s Los Angeles office, but it was built for the famous advertising firm Chiat/Day, which created the “1984” ad for Apple and Steve Jobs that introduced the Macintosh. Google relocated its Los Angeles office from Santa Monica to the Binoculars Building in 2011, a move that began the migration of the Los Angeles tech scene to Venice. But Snapchat is the most prominent homegrown startup, serving as the tentpole for Venice. Evan chose Venice because Snapchat is primarily an entertainment company, not a technology company. And Southern California is the perfect place to start a popular entertainment company.

  “Because consumer technology has become popular culture, you really need to understand popular culture to be able to have an insight about it,” early Snapchat investor Jeremy Liew later said. “Then to be able to drive new innovation from that. I think Silicon Valley is such an isolated bubble, our reality is not the reality of a normal American in normal America. That is what is preventing as much insight and therefore innovation happening here.”