You Only Have to Be Right Once (14 page)

Escorted to the back room for music and Persian tea, Houston was sure that it was all a joke. “I was waiting for the candid cameras to show up,” he remembered.

But within a day Nozad had Dropbox pitching Sequoia for funds. He'd called his buddy Leone, who immediately e-mailed Houston for a meeting. “He was our biggest booster, and we'd met the guy that week,” Houston added. Two days later Sequoia partner Mike Moritz (who said he “always takes Pejman's calls”) dropped in early on Houston and Ferdowsi at their apartment to make the final decision. Two days after that Nozad delicately inserted himself into a wine-soaked dinner at Pane e Vino in San Francisco, where Sequoia partner Sameer Gandhi (who later went to Accel), Houston, and Ferdowsi hammered out a $1.2 million seed round.

Nozad barely said a word but made sure to leave that night with a piece in Dropbox for Amidzad. “He'd done the introduction, and we wanted to do right by him,” says Gandhi. Based on Dropbox's 2014 raise, at a $9.6 billion valuation, that stake is worth in the ballpark of $150 million.

• • •

AS NOZAD WANDERED THROUGH
a wood-paneled library at Stonebrook Court, a 30,000-square-foot Tudor mansion and estate owned by his buddy Kelly Porter in Los Altos Hills, just north of San Jose, he took note of the dreary nineteenth-century paintings covering the walls. A warm flame crackled in a carved marble fireplace. “Can you believe this exists here?” Nozad said. He peeked into the ballroom to admire the sixteenth-century painted Venetian ceiling. “I'm talking to Lady Gaga's people. I want to host a party here for all of my entrepreneurs. Wouldn't that be amazing?” he said. That wasn't totally absurd, as Nozad was an investor in the musician's startup, Backplane.

Porter works for a small mergers and acquisitions advisory firm. He was doing a favor of sorts for Nozad. Earlier in the day two dozen investment bankers and deal lawyers gathered in the ballroom of Stonebrook Court as the heads of corporate development from Google, Facebook, Twitter, and other top firms divulged where they were looking to do acquisitions. These are the kinds of cozy conversations that make Silicon Valley run. Nozad was invited, then asked to bring a few of his entrepreneurs, including a fresh-faced twenty-one-year-old who had just dropped out of Stanford to do something in social payments. The kid barely had a company.

During cocktails Nozad's scruffy-looking crew stuck together like a high school clique even though most barely know one another. Everyone else was wearing dark suits. “I still have to pinch myself every now and then,” said Shane Hegde, the Stanford dropout. “That I'm here, living this life. Pejman is a great guide.”

Nozad believes Hegde is “brilliant,” and he invested in Swap, his nascent startup which hasn't gained traction. He didn't push introductions at the Stonebrook soiree, though. When an M&A lawyer asked Nozad what he does, he merely says he “invests in amazing people.”

That business has gotten more complicated. It used to be a rich man's hobby. But a raft of so-called super angel funds, including Paul Graham's Y Combinator, Eric Schmidt's TomorrowVentures, and Ron Conway's SV Angel, have since raised hundreds of millions to dabble in newly launched startups, promising connections and expertise along with checks. “There are too many of them investing in too many deals,” snickered one prominent venture capitalist. “This doesn't end well for a lot of white-haired guys who should know better.” Meanwhile, the big-money venture capital firms are doing smaller deals to get early access into promising companies.

Nozad isn't worried. He can offer entrepreneurs something others won't. Once, he gave an entrepreneur his wife's Mitsubishi Mirage. The guy was twenty-one years old, had just moved from Israel, and was broke. A year later he had a stake in that same guy's startup, alongside Sequoia. In 2011, he invested in a guy's company to give him enough cash to move from Texas to Palo Alto. “I don't like his business idea, but he is brilliant,” said Nozad. He regularly hosts events for Stanford's Persian student organization. The last one was a tour of Facebook's new headquarters. “They should hire all of these kids. They are so smart!” And one day, some of them will start companies and give Nozad a call.

A few nights later, Nozad gathered seven of his entrepreneurs in a private room at a New Orleans–style restaurant in Palo Alto. Three are Iranian. After a few glasses of wine the conversation drifted away from business models to stories of family back home. There were tales of nighttime caravans smuggling family members into the Afghan desert and talk about the years spent in limbo awaiting life in a better place. Nozad's eyes moistened as he described a trip he took to Iran a few years ago, bringing along his wife of nineteen years (his childhood sweetheart from Tehran) and his son and daughter.

He's come a long way from charming clerics into a military discharge. In 2010, Nozad decided to invest independently of Amidzad. He still does deals with the family but more are solo, where he is betting his own money. “I realized I'm actually kind of good at this,” he said. “I wanted focus.” He's already sitting on several windfalls besides Dropbox, including Addepar, the social networking site Path, social charity startup Causes, a gaming outfit, Badgeville, and dating site Zoosk. In 2013, he went further, opening a new venture firm with Mar Hershenson, a former entrepreneur with a doctorate in electrical engineering. They raised $40 million for the fund and have invested in startups like Sensor Tower, software to make targeted marketing easier, and Washio, a slick app that is the Uber of dry cleaning. The hustling middleman can now put serious money into his favorite deals.

And he still sells carpets—he's founded his own upscale rug gallery, bringing in his brother to run it. In America, where anything is still possible, such is how great fortunes apparently begin.

Evan Spiegel, Snapchat:
The $3 Billion Bet

What do you call someone who is twenty-three, has a company with zero revenue, and turns down a $3 billion buyout from Mark Zuckerberg? Perhaps the brashest entrepreneur since . . . Zuckerberg. In rejecting Facebook's billions, Snapchat's Evan Spiegel made a decision that will be scrutinized for decades. It's revealing that Spiegel's age isn't what people snicker about—twenty is the new fifty, and his connection to the teen market, which has figured out the value of having their digital past disappear, Snapchat-style, drives the company's momentum.

People do, however, question his maturity, myself included. A fun backstory: When this
Forbes
cover story first appeared in early 2014, Spiegel took to Twitter to deny a key, cocky detail regarding Zuckerberg and revealed an e-mail exchange that seemed to back it up. But then the writer,
J.J. Colao
, produced an audiotape confirming Spiegel's smack talk. And it turns out that the second half of the Zuckerberg e-mail, which Spiegel had conveniently clipped, also undermined his denial. So in one PR “masterstroke,” he was able to tick off Zuck,
Forbes
, and a slew of already-skeptical tech industry observers. A speed bump on the road to glory? Or a telling anecdote en route to business infamy?

 

I
n December 2012, Facebook's Mark Zuckerberg, the richest twentysomething in history, reached out to Snapchat's Evan Spiegel, who oversees a revenue-less app that makes photos disappear, with an invitation, delivered to his personal e-mail account: Come to Menlo Park and let's get to know each other. Spiegel, who was then twenty-two, with more than a little in common with Zuckerberg, including his own legal battle against a college buddy who helped him start his company, wound up taking the meeting . . . on his turf.

Armed with the premise of meeting with architect Frank Gehry about designs for Facebook's headquarters, Zuckerberg flew to Spiegel's hometown, Los Angeles, arranging for a private apartment to host the secret sit-down. When Spiegel showed up with his cofounder Bobby Murphy, who serves as Snapchat's chief technology officer, Zuckerberg had a specific agenda ready. He tried to draw out the partners' vision for Snapchat—and he described Facebook's new product, Poke, a mobile app for sharing photos and making them disappear. It would debut in a matter of days. And in case any nuance could be missed, Zuckerberg would soon change the large sign outside Facebook's Silicon Valley campus from its iconic thumbs-up “like” symbol to the Poke icon. Remembered Spiegel: “It was basically like, ‘We're going to crush you.'”

Spiegel and Murphy immediately returned to their office and ordered a book for each of their six employees: Sun Tzu's
The Art of War.

Snapchat represents the greatest existential threat yet to the Facebook juggernaut. Today's teens have finally learned the lesson their older siblings failed to grasp: What you post on social media—the good, the bad, the inappropriate—stays there forever. So they've been signing up for Snapchat, with its
Mission: Impossible
–style detonation technology, in droves.
Forbes
estimated that, as of the beginning of 2014, 50 million people used Snapchat. Median age: eighteen. Facebook, meanwhile, has admittedly seen a decline among teenagers. Its average user is closer to forty.

Zuckerberg understood this, which might explain the gamesmanship. When Poke debuted, on December 21, 2012, Zuckerberg e-mailed Spiegel, telling him that he hoped he enjoyed it. Spiegel, who had deactivated his Facebook account, frantically called Murphy for his review. It was, Murphy responded glumly, a near-exact copy.

But a funny thing happened on the way to obsolescence. The day after its launch, Poke hit number one on the iPhone App Store. But within three days, on December 25, Snapchat had pulled ahead, boosted by the publicity, as the Facebook app disappeared from the top 30. Recalled Spiegel, with glee: “It was like, ‘Merry Christmas, Snapchat!' ”

Which helps explain what happened in the fall of 2013 when Zuckerberg reengaged Spiegel, basically ready to surrender on terms so generous, on paper, they seemed preposterous: $3 billion in cash, according to people familiar with the offer, for a two-year-old app with no revenue and no timetable for revenue. (Facebook refused to comment.)

Even more preposterous, of course: Spiegel turned Zuck down. It was the most scrutinized business decision of the past few years, complete with head-spinning math.
Forbes
estimated that Spiegel and Murphy each still owned about 25 percent of Snapchat at the time, which means they were both forgoing a $750 million windfall. “I can see why it's strategically valuable,” said one leading venture capitalist. “But is it worth $3 billion? Not in any universe I'm aware of.”

The roots of that decision, however, were obvious to anyone who knew about the primer that Spiegel and Murphy had bought for their team. Chapter 6 of
The Art of War
specifically addresses the need to attack an enemy where and when he displays weakness. Spiegel and Murphy sensed an opening and insisted that rather than selling, they're aiming to upend the social media hierarchy, armed with a $50 million war chest raised in December 2013 at a lower (but still heady) valuation of just under $2 billion. “There are very few people in the world who get to build a business like this,” says Spiegel. “I think trading that for some short-term gain isn't very interesting.”

For those keeping score, a “short-term gain” for a then-twenty-three-year-old who still lived in his dad's house now apparently equals three-quarters of a billion dollars. In going for the long gain, Spiegel will either become the next great billionaire prodigy or the ultimate cautionary tale of youthful hubris.

• • •

A LANKY SIX FOOT
one, dressed in a button-down shirt, designer jeans, and plain white sneakers, Evan Spiegel hasn't molted the carapace of an awkward teen. As he sat in Snapchat's new Venice Beach headquarters for his first-ever in-depth media interview, he shifted abruptly from raucous laughter to icy glares, constantly grabbing fistfuls of gummy bears and Goldfish crackers. His conversation was pocked with plenty of examples of “like” and “whatever.” And while Spiegel proved extremely opinionated on subjects like politics, music, and other techies, he was reluctant to discuss even the most basic CEO topics, like his ideal management team or his long-term vision for Snapchat.

If you're patient enough, however—one of the conversations with him lasted two and a half hours—you'll get the full backstory, one that shares an uncanny similarity to that of his frenemy, Zuckerberg.

Like Zuck, he was a child of relative privilege, the first-born child of two successful lawyers (mom Melissa went to Harvard Law and practiced tax law before Spiegel was born, while litigator dad John, a Yale Law grad, has represented the likes of Sergey Brin and Warner Bros.), living in tony Pacific Palisades, just east of Malibu. And like Zuck, he was a middle school nerd who found refuge in technology, building his first computer in sixth grade, experimenting with Photoshop in his school's computer lab and spending weekends at a local high school's art lab. “My best friend was the computer teacher, Dan,” Spiegel laughed.

In high school he began to display the moxie that Zuckerberg would later exhibit, promoting Red Bull at clubs and bars and using his parents' divorce as a leverage tactic. He first moved in with his dad when he gave him a free hand in outfitting his room and who could come over. “I had some notorious parties,” he smirked. But when Pop reportedly refused to shell out for the lease on a BMW 550i, he moved in with Mom. Days later the BMW was his. Except for college, he's been based in his dad's home, a stone-faced mansion a half-mile north of the ocean, ever since. “A lot of things have changed very quickly, so it's nice to have that one constant,” he said by way of justification. “It's also pretty grounding.”

He entered Stanford's product design program and in 2010, during his sophomore year, moved into the Kappa Sigma fraternity house. Bobby Murphy, a senior major in mathematics and computational science, lived across the hall. “We weren't cool,” Murphy said of the fraternity. “So we tried to build things to be cool.”

While Spiegel speaks animatedly, albeit measuring what he's saying, Murphy, the Berkeley son of state employees (his mother emigrated from the Philippines), sits placidly, one leg tucked under the other. “I'd describe him almost like a monk,” said David Kravitz, Snapchat's first hire. “I don't think I've ever seen him upset.” At Stanford it was Murphy who first hired Spiegel, recruiting him to design an online social network inspired by Google Circles. It went nowhere.

Still, Spiegel was getting noticed. Intuit's Scott Cook was impressed by an answer he gave while guest lecturing at Peter Wendell's popular graduate-level class, “Entrepreneurship and Venture Capital.” “After class concluded, I commented on the intelligence and reasoning in this particular student's response,” said Cook. “And Professor Wendell said, ‘Well, you will be surprised to know he isn't an MBA student. He is an undergraduate who is auditing this class.'” Cook quickly hired Spiegel to work on an Intuit project that broadcasts Web-based information via SMS texts in India.

Spiegel, however, was in too much of a rush to remain content as an apprentice. In the summer of 2010, he and Murphy developed Future Freshman, a suite of online software to help parents, high schoolers, and guidance counselors manage college admissions. “It ended up being this unbelievably full-featured website,” Murphy recalled. One problem: “We got, like, maybe five people on the service,” said Spiegel.

That's when fate, in the form of another fraternity brother, Reggie Brown, stepped into Spiegel's room to discuss a photo he wished he hadn't sent someone. The ensuing set of events makes
The Social Network
look like C-SPAN2.

• • •

WHILE OWNERSHIP OF SNAPCHAT
remains hotly disputed, all sides seem to agree on the genesis: Brown said something to the effect of “I wish there was an app to send disappearing photos.” Brown refused to speak to
Forbes
, citing pending litigation, but his side of the story comes through via numerous court documents, including a leaked deposition. According to Brown, Spiegel became “physically animated” and repeatedly called Brown's remark “a million-dollar idea.” (Spiegel acknowledged he was excited, but won't comment about the “million-dollar idea” line.) That night they set out to find a developer. Brown claimed two candidates declined; regardless, they settled on Murphy, who had just graduated.

The original roles were fairly defined: Murphy as CTO, Brown as CMO, Spiegel as CEO, honing the idea as part of a design class he was taking. The first iteration was a clunky website that required users to upload a photo and set a timer before sending. The eureka moment only came when the idea migrated to mobile. “At some point it was like, ‘Hey, there's a camera on your phone,'” Spiegel said. “‘Wouldn't that be easier?' ”

The class culminated in a presentation to a panel of venture capitalists. Brown came up with a name for the app, Picaboo, and Murphy put in eighteen-hour days to get a working prototype. “The feedback was basically, ‘Hmmmm. Well, thank you for showing us your project,'” recalled Spiegel. One investor suggested he partner with Best Buy. Many wondered why anyone would want to send a disappearing photo.

The first version debuted in the iOS App Store on July 13, 2011 . . . to yawns. “The Instagram fairy tale”—the app had 25,000 downloads on the first day—“that was not us, unfortunately,” Murphy said. The team had worked around a potentially fatal flaw—the fact that recipients can take a screenshot, rendering a disappearing image permanent—by building in a notification if your picture has been captured, a potent social deterrent. Still, by the end of the summer Picaboo had only 127 users. Pathetic. Brown toyed with positioning the app as a sexting tool. (“Picaboo lets you and your boyfriend send photos for peeks and not keeps!” reads a draft of a press release he wrote.) Murphy's parents implored him to get a real job. And Spiegel apparently began pushing to shake up the team. According to Brown's deposition, he overheard Spiegel and Murphy plotting to replace him.

The breaking point came when equity was being finalized. A month later, Brown, back home in South Carolina, called his two partners and laid out his case. He wanted around 30 percent, according to Murphy's deposition, and listed his contributions: the initial idea, the Picaboo name, and the now-famous ghost logo. Spiegel and Murphy countered that he didn't deserve anywhere close to that. When Brown claimed that he had “directed [the] talents” of Spiegel and Murphy, Murphy remembered, an enraged Spiegel hung up. Spiegel and Murphy changed administrative passwords for the app and cut off contact except for a few tense e-mails about a pending patent. Brown was out, relegated to something of a Snapchat version of the Winklevoss twins or Eduardo Saverin. (Ironically, in their battle with Brown, Snapchat hired the legal team that pursued the Winklevoss claim against Facebook.)

Now a two-man operation, Picaboo changed its name to Snapchat after receiving a cease-and-desist letter from a photo-book company with the same name. “That was like the biggest blessing ever,” said Spiegel. But even as he and Murphy added photo caption capabilities, they seemed destined to replicate their Future Freshman experience: a technically competent product that virtually no one wanted. Spiegel returned to Stanford for his senior year; Murphy took a coding job at Revel Systems, an iPad point-of-sale company in San Francisco.

But that fall Snapchat began to exhibit a pulse. As user numbers approached 1,000, an odd pattern emerged: App usage peaked between 9:00 a.m. and 3:00 p.m.—school hours. Spiegel's mother had told her niece about the app, and the niece's Orange County high school had quickly embraced Snapchat on their school-distributed iPads, since Facebook was banned. It gave them all the ability to pass visual notes during class—except, even better, the evidence vanished. Usage doubled over the holidays as those students received new, faster iPhones, and users surged that December, to 2,241. By January, users numbered 20,000; by April, 100,000.