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Social media start-ups' value is enormous — if you trust investors

Although valuations in Silicon Valley are super-high, this may not be as much of a bubble as it seems, some experts say.

November 16, 2013|By Jessica Guynn

Having previously nixed a $1-billion offer from Facebook, Snapchat belongs to an exclusive club of white-hot start-ups that have rejected mammoth offers in high-stakes gambles, hoping to become multibillion-dollar companies in their own right.

Many of those bets haven't paid off. Take daily deals service Groupon Inc., which foundered after rejecting Google's nearly $6-billion bid in 2010 before its IPO, or social media pioneer Digg, which once fetched a heady valuation of more than $160 million, only to sell for about $500,000 last year.

Facebook is one of the lucky companies to spurn suitors and come out on top. It turned down a $1-billion buyout offer from Yahoo Inc. and one for $15 billion from Microsoft Corp. Today it has a market cap of $120 billion.

But for every Facebook, there are plenty of Myspaces. Very few start-ups grow up to be huge successes.

And now Facebook is on the prowl for those companies that have gained the rapt attention of young people and pose a threat to its own online hegemony.

In April 2012, Facebook made its biggest acquisition with a cash-and-stock deal initially valued at about $1 billion for Instagram. Instagram soared in popularity by giving young people a fun way to share photos on mobile devices.

In May, Yahoo borrowed a page from Facebook and paid $1.1 billion to buy blogging service Tumblr, a 6-year-old company with more than 100 million users but little revenue. Tumblr is popular with young people, in sharp contrast to Yahoo's older user base.

The powerful momentum of these young companies "threatens the incumbents very quickly," said Internet veteran Jonathan Miller, an investment partner with Advancit Capital.

"What used to take three years can now take a half a year because the adoption is so fast," he said.

With Snapchat, investors are enamored by the numbers. Nine percent of U.S. smartphone users are on Snapchat, according to a Pew Research Center study released last month. Some 350 million "snaps" are shared each day on Snapchat, up from 200 million in June.

After Facebook Chief Executive Mark Zuckerberg first met and was rebuffed by Snapchat, Facebook released a Snapchat rival called Poke.

At the TechCrunch Disrupt conference in September, Snapchat's Spiegel called the Poke app "the greatest Christmas present we ever got."

Poke never took off — a big problem for Facebook, which is chasing young users. Facebook Chief Financial Officer David Ebersman told analysts last month that the social media giant had seen a decrease in daily users, specifically among younger teens. Facebook has a large war chest to deal with that problem: $9.3 billion in cash and investments.

But the clock may be ticking on Snapchat. For all its early success, its founders may end up regretting not taking the money, said David Wessels, a finance professor at the University of Pennsylvania's Wharton School.

"We see one CEO after another come through the Wharton school and say, 'I wish I had taken the money when I had the chance,'" Wessels said. "Never take the money for granted. It won't always be there tomorrow."

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