This seems to show the system working. Everpix was a reasonable idea with good execution, but nobody could see how it would be eventually profitable. That it didn't get funded is evidence that we're not in a bubble.
The same rules apply to Snapchat, but keep in mind the cost per user for Snapchat are minimal. A few photos kept around for a temporary period. If they have a reasonable amount of smarts, the cost for doing that, especially at the scales they can now purchase, will be negligible. The revenues they can get from each user in terms of advertising is highly likely to sustain them, and their large user base means a large revenue base.
Thus, in their specific case, it's hard to make the case that it's a bubble. And if they are bleeding users away from Facebook, then FB will pay a premium to stop that bleeding. Thus the FB offer is not unreasonable, no matter how ridiculous it looks on the surface.
Now, if their user growth slowed for some reason, then yes they will be kicking themselves for not taking said offer. It has happened before - e.g. Friendster, etc. But those are usually self-inflicted wounds. Assuming their investors keep them from such moves, there is a good chance they can be a large sustainable company.
I actually agree with you – i'm sure Snapchat, considering their growth and userbase, can turn into goldmine if they play their cards right. It's just weird that a company with an actual revenue is mentioned as an example of us not being in a bubble, while one mobile app without any revenue simply turns down 3+ billion offer - no bubble over there.
And you're familiar with the economics of Snapchat, how, exactly? Among other things, I'd expect Snapchat's marginal costs to be much lower than Everpix's.
<opinion rel="armchair">Just looking at the two products, I think Snapchat's #1 business priority should be getting as big as possible as fast as possible, whereas I think Everpix's #1 business priority should've been to make the unit economics work.</opinion>
What if some "greater fool" came in and bought Everpix for $50 million, like Yahoo, or AOL? Then we wouldn't be coming up with all these reasons why they failed, but instead would've congratulated them on their hard work, smart strategy and success (funny how these things work, huh?)
If Facebook didn't buy Instagram, they would've had the same outcome as Everpix eventually. If eBay didn't acquire Hunch, they've flunked eventually. If Google didn't acquire Blogger, they would've sunked too. I'd love to see Foursquare survive for 4 more years without an exit.
While I'm absolutely certain that Snapchat's marginal costs are much lower than Everpix's, Everpix had real revenue. If we're talking about bubbles, surely that has to count for something - a product people actually are willing to pay for?
You can sell a widget for $10 when it costs you $20 to make. Million of people will buy it because it's such a great value. You will have tens of million in revenue!
First, Everpix had revenue, yes, but they had negative marginal profit (http://en.wikipedia.org/wiki/Marginal_profit). Since their business is based around charging customers $X/month, their unit economics are incredibly important. If I buy candy bars for $3 and sell them for $2 I can also show "real revenue," but nevertheless this is still a terrible business.
Second, what's a better business, Google + Adwords or Google + charging $5/month/user. The latter puts a tight upper limit on the total size of your market. Google is unquestionably more profitable with the former business model rather than the latter, but it took Google years of not being profitable before they made it happen. If you look up articles about Google in the late 90s they were filled with hand-wringing about how they'll make money. The same goes for Facebook, which I think most HN users still dismiss as a fad. Nevertheless, they're very profitable and have been for many years.
VCs care mostly about the size limiting case and how likely we are to reach that limiting case. You can say this is stupid, counterproductive, etc., but for whatever reason that's the course Everpix decided to pursue. The logic of VC investing makes sense and it was Everpix's decision to take that route vs. remaining small-but-profitable, assuming the latter was actually an option.
Third, we can also contrast SnapChat and Everpix's situation from a game-theoretic perspective. Let's say SnapChat was charging, I dunno, $5 to download the app. Conservatively, let's assume that had no effect other than X% fewer people downloading the app. So, fewer people download the app, but we now have a very, very nice gross margin. In fact, let's say there were 5 similarly-sized SnapChat clones, each charging the same amount.
What would you do if you were one of those competitors? I can tell you what I'd do — I'd make my application free and build up the largest network I possibly could, knowing that the main value users get out of a communication app/network is the number of people on the network with whom they want to communicate (cf.http://en.wikipedia.org/wiki/Metcalfe's_law).
Since a player in this hypothetical SnapChat space could improve their situation by changing their strategy unilaterally, we see that the "charge for SnapChat" situation is not in a Nash equilibrium and it'd be irrational for us not to adopt this new strategy ourselves.
Of course, this only works when the new strategy is viable — in this case, the "free for users" strategy. Because their marginal costs are much lower, it is significantly more viable for Snapchat than Everpix. Indeed, for Everpix it will just make their overall situation worse.
That revenue may have worked against them. It puts some tighter bounds on what they would need to get to subscriber wise and the kind of conversion rate to paid accounts that could realistically be obtained.
Companies that haven't started monetizing can be more hand wavy about the potential revenue and growth.
I didn't quite read a lot of skepticism about it being "eventually profitable". Rather there was more hand-waving about "not being a $100M - $1B" business, which is something else altogether.
(Sort of depressing IMHO; does every new web business need to be Facebook-scale these days to be worthwhile?)
"does every new web business need to be Facebook-scale these days to be worthwhile?"
To a VC yes. That's the business model of their fund. I think if Everpix had attracted a different class of investors they might have been more successful fundraising.
Exactly. Everybody always talks about getting VC funded, but there are plenty of good money-making businesses that a VC wouldn't touch but that could be great for a smaller investor. Usually these businesses charge for their products and have demonstrated that people are willing to pay.
Everpix decision to depend on a subscription model with a service that is surrounded by (inferior) free alternatives made sense economically, but it didn't make sense financially.
I can't say if they would have had more success with a free model. But in any case start ups are never a safe investment, and blocking adoption rates with a subscription fee certainly limits the appeal to a fund that has to see a potential for extremely high returns.
