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Tech start-ups often seem unable to resist the offers made to them by bigger tech firms. YouTube was bought for $1.65bn by Google when it was only a year old back in 2006, and since then the race for acquisitions in the technology sector has continued at pace. Over its lifetime Google has bought over 130 companies, Yahoo! has acquired 90, and Facebook has purchased 40.
Even in the past few years there have been a number of acquisitions with hefty price tags as the race to dominate social media continues. Facebook paid $1bn for Instagram in 2012, Microsoft paid $1.2bn for Yammer in the same year, and in 2013 Yahoo! paid $1.1bn for the blogging site Tumblr. Few of the companies stay independent for long- Instagram was three years old when bought, Yammer was four, whilst Tumblr was practically ancient at six.
And so the search for next big tech start-up continues. Like a new series of the X Factor a company will get lucky and be tipped to be the next big thing, before everyone realises it is over-hyped and useless (think X Factor's Leon Jackson to the tech industry's Bebo). The current hype surrounds the two year old Snapchat, an app that is extremely popular with those aged between 16-24. For those who haven't experienced it yet, it involves sending a picture to friends where the image deletes itself after a few seconds. The company boasts that over 400mn snaps are sent every day, more than are uploaded to Facebook daily, although it does involve the same snap sent to multiple recipients.
Still, it is an impressive amount of users. The question that still hangs over the company is can it ever be profitable. It currently has no revenue and is instead relying on investors continuing to pump cash into the business, having raised another $60mn in June to continue paying staff and IT costs.
So, how do you value a company with no revenue and an audience that - although denied by its founder - seems to be primarily sexters? The answer according to Facebook is $3bn, an offer they made to the founder earlier this month. When this was rejected Google went one better and offered $4bn, which was also rejected. Instead Evan Spiegel, the founder of Snapchat, hopes that the app can start to generate revenue by getting users to pay for added services. This appears to be slightly ambitious; when even huge companies like Facebook and Twitter won't ask users to pay to use the service, consumers are unlikely to be willing to pay to send inane photos to each other.
However, the continued success of apps like Candy Crush proves that added extras can generate huge revenues.Whether it succeeds or fails Spiegel has taken a huge gamble. He has bet $4bn that he can transform his app into something that users are willing to pay for. If he fails he risks going the same way as MySpace, Bebo, Friends Reunited, and Farmville, to mention just a few of the tech fads that took the world by storm before disappearing again. To continue the X Factor analogy it could all go horribly wrong like Steve Brookstein, or be a roaring success like that other one.