How to Turn Down a Billion Dollars

by Billy Gallagher

  Despite significant executive turnover in 2014 and early 2015, Evan settled in with a core group of executives, led by Khan, Sehn, and Bell, to drive Snapchat forward toward an IPO.

  CHAPTER TWENTY-EIGHT

  THE ROAD TO IPO

  JUNE 2015

  RANCHO PALOS

  VERDES, CA

  The Code Conference is an annual tech conference held at an exclusive resort in Rancho Palos Verdes, California. The high point of the conference is an interview with tech press legends Kara Swisher and Walt Mossberg. The two have sat in iconic red chairs across from the biggest names in the business, from Steve Jobs to Elon Musk to Bill Gates.

  Now, in June 2015, Evan sat in one of those same red chairs as Swisher and Mossberg probed about Snapchat’s future.

  Initial public offerings are in many ways the finish line for startups. They are liquidity events, giving founders, employees, and investors an actual hard cash return on the years of investment and work they’ve poured into the company. They supply the company with funds to carry out its grand ambitions for the future. They show the world that public market investors diligently vetted this company and are willing to buy its stock. After an IPO, a company graduates from startup to publicly traded company.

  “We need to IPO,” Evan told Swisher and Mossberg. “We have a plan to do that. Obviously, I can’t give you too much color there. An IPO looks like a lot of things, but most importantly it looks like another dot in the growth of our business. We don’t view that as the end, it’s just the beginning.”

  Only a handful of companies in the history of the internet have had as many users as Snapchat had at that moment in 2015. Snapchat sat on a potential goldmine but hadn’t yet proven the ability to mine that gold. It was one thing to reject Facebook with the belief that they could probably make the company worth more than the $3 billion offered. It was another to actually earn millions of dollars in revenue without hurting user growth and engagement.

  There were two main ways for Evan to increase Snapchat’s valuation: user growth at engagement driven by new product offerings and better advertising products to increase Snapchat’s revenue per user. Snapchat would need to execute on both fronts.

  In the early days of its advertising push, Snapchat was a very difficult company to work with, demanding high prices and customized content and offering advertisements with very few analytics and very little measurement. Team Snapchat understood their power as the new “it” app and gateway to a difficult-to-reach yet valuable demographic. It wasn’t uncommon for advertisers to refer to working with Snapchat as “a pain in the ass.”

  When Martin Sorrell, the CEO of advertising conglomerate WPP, met Evan in 2014, Sorrell told him, “You’re the first twenty-five-year-old billionaire I’ve met.” “I’m twenty-four,” Evan responded.

  The company required a minimum ad spend of $750,000 per day. Snapchat told advertisers that users are nine times more likely to view Snapchat’s vertical ads because they don’t need to rotate their phones. For advertisers, the higher completion rate was good, but vertical video meant they had to shoot things exclusively for Snapchat rather than repurposing ads from YouTube and Facebook.

  As people increasingly spent time on their mobile phones, vertical video—optimized for holding a smartphone upright—began to make more sense than horizontal—optimized for TVs, laptops, and desktops. Evan didn’t see the point in making people turn their phones sideways to see a Snapchat in full screen. So everything on Snapchat was made to be viewed vertically. Advertisers eventually came around to Evan’s point of view and shot content specifically for Snapchat despite the extra cost. Now over eight billion vertical videos are viewed every day.

  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 a necessary evil, he considered it as another 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.

  When Emily White and Mike Randall left Snapchat in early 2015, Snapchat took a step backward with advertisers. White and Randall had been the face of the company to many advertisers. Then, all of a sudden, neither one was at Snapchat. Some advertisers felt like Snapchat was a black hole for six months as it scrambled to rearrange the sales team.

  Imran Khan ran the sales team while Evan searched for someone to run the advertising effort. Khan and Evan were both so busy that some advertisers have likened getting a meeting with them to enjoying an audience with the pope. Like most of Snapchat, the sales team was young and growing fast, with a lot on their plate as they worked to compete with very mature businesses. Evan opened an office in New York City to improve relationships with advertisers and media partners. And Evan and Khan became more receptive to advertisers’ feedback.

  And Snapchat has come around on prices and measurement. The company has amended their terms of service several times so they can give advertisers more targeted offerings. The result has been a thousand paper cuts into the privacy and antitracking stance Snapchat once held. Snapchat now lets advertisers segment people by location, gender, age, device, operating system, and wireless carrier, although some of these require users to volunteer this information, like their birthday.

  Snapchat commissioned Nielsen to do a study of its highly coveted demographics compared to TV networks. The study showed that Snapchat reached 41 percent of all eighteen- to thirty-four-year-olds in the United States, while the top fifteen US TV networks reached only 6 percent of the same group. Snapchat signed another deal with Nielsen to track Snapchat ads using gross ratings point, one of the advertising industry’s standard metrics. The brash startup wanted advertisers to compare apples to apples and see for themselves that Snapchat was the new TV.

  Evan was constantly looking for ways to improve Snapchat’s user experience and increase its revenue. In September 2015, Snapchat purchased a startup called Looksery that could help do both.

  Based in Odessa, Ukraine, Looksery had an app that let users select a face filter that altered their appearance. Looksery cofounder Yurii Monastyrshyn liked to open job interviews by asking candidates, “Why did Snapchat become so popular?” Snapchat shut down Looksery’s standalone app and integrated the technology into its camera. When users pressed and held down on their face in Snapchat, a menu of lenses (so called to avoid confusion with geofilters) popped up at the bottom of the screen. Depending on which one a user chose, a lens could make them look more attractive, much less attractive, make them vomit rainbows, or make their head explode into a fireball.

  Lenses changed daily, drawing users back to check out what new ones appeared and letting Snapchat continuously experiment to see which struck a chord. The popular ones—a flower crown that made you look pretty, a dog’s ears and nose, a wide, goofy smile that made your voice sound funny—stayed, while others rotated regularly.

  Snapchat had long relied on the selfie as a way of expression and reaction. Looksery took that and made selfies exponentially more expressive. Lenses’ integration was a prime example of Snapchat’s ability to add features without becoming clunky. If you wanted to use Snapchat like it was 2011, you could still just pull out the app, snap a photo, tap, and send it to a friend. But if you knew what you were doing, you could do so much more—you could hold your finger down on the screen before you took a photo to pull up new lenses; you could swipe after taking a photo or video to add filters and geofilters denoting the time and place of your snap or transforming it into black and white.

  Almost immediately after Snapchat launched lenses, it monetized them. In October 2015, Fox Studios bought geofilters and lenses to promote The Peanuts Movie, letting users turn themselves into Snoopy or Woodstock. Snapchat briefly offered some lenses as in-app purchases, offering users a daily selection of free lenses and others for $0.99, but it quickly abandoned this effort, shutting down its lens store
in January 2016, just two months after it launched. Snapchat users were purchasing tens of thousands of lenses per day, but this revenue did not add up to equal that of even one Snapchat ad, so Snapchat shut down the store to focus on advertising.

  Lenses gave Snapchat’s sales team another unique creative tool to pitch advertisers. Snapchat’s sales team began pitches by emphasizing how the app was about communication and self-expression, and how Snapchat was different from Facebook and Instagram. Then they explained to advertisers that Snapchat could now offer packages mixing and matching ads in Live, ads in Discover, lenses, and geofilters, targeted to specific areas or for the whole world. Snapchat helped marketers pick which ad products would play best based on their brand, and helped with creative creation of ads, lenses, and geofilters. Snapchat did not yet have the scale or data that Facebook or Google offered. But it had a unique media format that was extremely compelling to users and advertisers alike.

  Lenses became an increasingly lucrative advertising source as Snapchat worked with brands to create a new interactive advertising format. In December 2015, Imran Khan traveled to Chicago to meet with Gatorade executives. He proposed a Super Bowl lens that dumped a virtual cooler of Gatorade over users, like players do to coaches when they win the Super Bowl. Gatorade shelled out hundreds of thousands of dollars to run the lens for two days over Super Bowl weekend; Snapchat users watched the lens, seeing it in friends’ messages and Stories and trying it out themselves, over 160 million times.

  Taco Bell’s team worked with Snapchat for six weeks to create a sponsored lens for Cinco de Mayo that turned users’ heads into a giant taco shell. The lens was viewed 224 million times in a single day. Users played with the lens on average for 24 seconds, adding up to 12.5 years’ worth of unique play over the course of the day.

  Augmented reality has long been a nerd’s utopian dream. It would have been hard to predict even just a few years ago that AR’s first big break would be teenagers vomiting rainbows, wearing dog ears, and turning themselves into taco shells with Taco Bell stamped on them. If Evan’s biggest bet yet pays off, Snapchat will own the future of AR too.

  Advertisers were quickly learning that if they worked with Snapchat, they could create ads that users spent a lot of time interacting with rather than jamming TV commercials into the app. Snapchat geofilters had long been available to advertisers for specific single-day promotions and for chain retailers and restaurants to put at their stores. At McDonald’s, users could add a geofilter of a double cheeseburger and french fries to their Snapchats. In February 2016, Snapchat opened up sponsored geofilters to everyone, allowing users to pay for a custom filter for their birthdays, parties, engagements, or whatever else they could come up with. Starting at five dollars, on-demand filters could be as small as an office or as large as multiple city blocks, and could be live for as little as an hour or as long as thirty days (with the price changing based on size, duration, and timing of the filter).

  By the fall of 2015, marketers seemed to have figured out how to create ads that aligned with the way users acted on Snapchat. In October 2015, Snapchat let Sony Pictures Entertainment, board member Michael Lynton’s studio, buy a twenty-four-hour Discover channel for the new James Bond film Spectre. Instead of running ads inside a Discover or Live channel, Spectre had its own channel for a day, full of marketing material and clips from the film. The Spectre channel, which users viewed over forty million times, was a better-realized version of Snapchat’s original ad format, the standalone Live Story advertisement for Universal Pictures’ horror movie Ouija.

  Studios would continue to experiment with ways to use Snapchat to drive people to theaters and their TVs. In May 2016, AMC premiered five minutes of its new series Preacher inside Discover. Later that month, 20th Century Fox paid to make every Snapchat lens a different X-Men character for its upcoming X-Men: Apocalypse film. If Snapchat users swiped up on one of the several X-Men ads running in Live and Discover, they could buy tickets for the movie without even leaving Snapchat.

  CHAPTER TWENTY-NINE

  THE NEW TV

  OCTOBER 2015

  VENICE, CA

  Evan was willing to take big swings on developing Snapchat’s own content but quick to pull the plug if the team could not produce results.

  In October 2015, Evan decided to shut down Snapchat’s own channel on Discover. Snapchat’s channel had launched with a lot of promise, featuring original shows like Sasha Spielberg and Emily Goldwyn’s Literally Can’t Even. But the short series failed to resonate with viewers and develop a significant following. Marcus Wiley, the former Fox executive leading the team, and many of the fifteen employees working on the channel were laid off.

  It came as a major surprise, as Wiley and other Snapchat employees had been pitching shows to major studios and production companies and the channel’s programming team had just settled into a twelve-thousand-square-foot studio in Marina del Ray. But it was a stark reminder that Evan was going to try out a lot of wildly different strategies for Snapchat, and not all of them would be successful. In order to best serve users and conserve resources to focus on the things that were working, Evan would be ruthless about cutting things that didn’t work.

  Earlier in 2015, Evan poached CNN’s thirty-three-year-old political reporter Peter Hamby, giving him the newly created role of head of news as Snapchat expanded into more serious content. Hamby had spent a decade at CNN, spending the last eight as a national political reporter.

  Like Chloe Drimal, Ellis Hamburger, Nathan Jurgenson, and others, Hamby had original and often provocative opinions about the the coarsening impact of the digital era on politics. In 2013, Hamby wrote a ninety-five-page report criticizing campaign coverage in the digital era. Drawing on his experiences from the 2012 campaign trail, Hamby wrote that social media forced both the media and campaigns “to adapt to a treacherous media obstacle course that incentivized speed, smallness and conflict, leaving little room for good will or great journalism—but plenty of tweets.”

  At first glance it may seem deeply ironic that Hamby would choose to join Snapchat two years after writing that. But Evan shares Hamby’s qualms with the media’s focus on speed and smallness. It’s one of the main reasons he created Discover as a walled garden with no retweets or hourly updates. Spiegel offered Hamby a chance to use Snapchat’s power as a camera and broadcasting device in millions of people’s pockets to produce high-quality journalism.

  Hamby hired CNBC producer Katy Byron to be his managing editor at Snapchat. They next hired half a dozen more colleagues from CBS, ABC, and cable networks to staff their new Snapchat Discover show. Hamby’s clout and access immediately paid dividends, as he interviewed New Orleans mayor Mitch Landrieu during a Snapchat Live Story covering the Hurricane Katrina commemoration.

  But the main stage for Hamby and Snapchat’s news team was reporting on the 2016 US presidential election.

  “I’m Peter. I’m a reporter. I’ve been covering politics for a really long time. I’ve crushed beers with Hillary Clinton, flipped burgers with Mitt Romney and argued with very important people on television,” Hamby said in January 2016 to kick off the inaugural episode of Snapchat’s election show Good Luck America from the campaign trail in Iowa. “We’re now in the middle of the weirdest election I’ve ever seen. Let me show you the people and places that really matter.”

  Good Luck America aired whenever there was interesting political content to cover, from caucuses to primary races to debates. It didn’t have a schedule or announcements, it simply popped up in Snapchat’s Live section when there was an episode. Every episode Snapchat produced was viewed by at least a million people, and twenty-two million people watched a portion of the twelve-episode debut season of Good Luck America.

  Hamby mixed live reporting with user-recorded footage, reporting the news and explaining a bit of the political process to Snapchat’s young audience. “Think of the primaries like The Hunger Games—but with much less attractive people,” Hamby explained in t
he pilot episode. The result was an interesting hybrid of the professionally produced Discover and the user-generated Live Stories.

  Users were soon submitting photos and videos taken behind the scenes, often at events closed to the press. Hamby interviewed a cast of characters, from a canvasser for Bernie Sanders to Republican presidential candidate Chris Christie to an Iowa high schooler who registered “Deez Nuts” as a candidate.

  The format had its drawbacks. Hamby’s segments were shot on high-resolution cameras and allowed to run longer than ten seconds, the limit Snapchat traditionally imposed. But user-submitted snaps were shot on smartphones and subject to the normal limitations of the app, so it was often difficult to hear exactly what a candidate was saying. And many candidates’ speeches or remarks at debates were difficult to fit into a ten-second Snapchat.

  To mitigate this, Snapchat adapted geofilters to add a layer of context. While they had initially been used solely to denote where a user was, geofilters now could include quotes from a candidate’s speech, an explanation of what had happened, and live-updating results from primary races.

  Soon the candidates started using Snapchat’s geofilters as well, paying to have custom filters at debate halls and rallies. In January 2016, Ted Cruz mocked Donald Trump’s absence at the final Republican debate with a filter asking, “Where is Ducking Donald?” accompanied by a yellow duck sporting a Trump haircut. Bernie Sanders’s campaign ran a different geofilter every day for nine straight days leading up to the Iowa caucus. Most urged voters to “Feel the Bern” and get out to vote on caucus night. In May 2016, Hillary Clinton’s campaign placed a geofilter at the Anaheim Convention Center, the site of a Trump rally. The filter showed Trump’s own words from 2006 against a yellow background: “I sort of hope [a housing crash] happens because then people like me would go in and buy.”