It’s obvious why Snapchat parent Snap Inc. is going public. There’s a good $2.36 billion reasons.
That’s how much money that the company has raised from a cadre of investors, who are now licking their chops at the prospect of cashing in on a company that will debut at a valuation of around $20 billion. This is the day they have been waiting for.
It’s not the only reason, but it’s a big one. By going public, whatever money the company can bring in each year (millions, not billions) — along with $3 billion from the IPO — will flow back to the company executives, employees and the business in general.
It’s sound reasoning, but still doesn’t answer that most important question: Will going public ruin Snapchat? Will the pressure and scrutiny make its astonishing, 5-year-long run vanish like yesterday’s snap?
As always, the past is prologue.
In the relatively short history of social media public offerings, the results are decidedly mixed. Facebook is a success story even if investors didn’t necessarily believe in the Facebook story and outlook when it went public in 2012. The company not only relied heavily on the unpredictable advertising market for revenue, but most of it was coming from desktop views. Facebook hadn’t even figured out how to monetize mobile users yet.
Facebook is now a social media triumph. It could be argued that going public is what saved the company. It had to please shareholders with growth and revenue and please members by providing a rich experience on all screens. The only way to do that was to focus on mobile. Facebook CEO Mark Zuckerberg transformed Facebook into a mobile-first company — a brilliant and remarkable accomplishment that we could witness happening quarter-over-quarter. After trading as low as $19 a share in the summer of 2012, it’s currently riding high at $134 a share.
Contrast this with Twitter. Its post IPO existence has, in some ways, been no less dramatic. Twitter managed, over the course of four years to add more than 100 million new monthly active users. But growth has stagnated in the last two years; it can’t make a profit, and concerns about Twitter’s inability to protect its users from trolls persist. The company’s stock has tumbled from a high of $69 to $18 as investors grow impatient over Twitter’ inability to find a buyer. Twitter’s revenue is up and coming almost entirely from mobile advertising, which should make investors happy, but the lack of growth, profit (and maybe purpose) scares them. It is difficult for any company to operate under the nervous eyes of jittery stock holders — which may be the biggest lesson for a soon-to-be-public Snap.
So what will life be like for a post-IPO Snapchat? Will it wither under the crushing demands of impatient shareholders? Will it become as quiet and as cautious to satisfy risk-averse investors?
“I worry about the valuation of the company in respect to its track record and, brutal honesty, whether or not it will ever return profit or shareholder value,” said Brian Solis, principal analyst at Altimeter Group and someone who never invested in Snapchat.
Snapchat, Solis explained, has no choice but to go public and do so in an aggressive way. He expects the company to face many of the same challenges as other companies that go public. “Any public company has to contend with shareholders. Hopefully during their roadshow, they solicited risk-taking shareholder…The company is going to need to be very aggressive in its growth and expansion,” he said.
Solis, though, also pointed out several key similarities between Facebook and Snap that may help it avoid Twitter’s fate and stay true to its core. Like Facebook, Snap has a singular leader who, like Zuckerberg, has publicly declared his intention to put users ahead of shareholders.
The 45-year-old market expert uses Snapchat frequently, but is clearly not part of its core user base. According to Snap’s S1 filing, most of its users are between 18 and 34 years old, and most of the activity generated on the platform comes from those under 25.
I needed to talk to someone who better represented Snapchat’s core user base.
17-year-old Connor Blakley, whom I met through Solis, told me Snapchat is his number one social media platform. The somewhat atypical teenager is a young entrepreneur, advising Fortune 500 companies on their social media marketing strategies and working on a book called BrandZ (unlike Millenials or GenX, youthful Gen Zs are Snap’s core customers). Even so, his insights on the future of Snapchat rang true.
He likes Snapchat and is especially impressed with how it integrates advertising with the user interface (especially filters) “so it feels like a seamless customer experience.” He is a little worried, though that the increasing focus on Snapchat stories has “started to fuck that up a bit.”
Like Solis, he recognizes key differences and a significant similarity between Snapchat and another high-profile tech company that went public 20 years ago
Blakely notes that the filing puts Spiegel firmly in control of the company post IPO and he expects him to act a lot like Bezos.
Spiegel, by some measures, will control over 40% of the shareholder voting power in Snap post IPO, which is somewhat reminiscent of Facebook, where Zuckerberg owns 57% of the voting power and Amazon where Bezos reportedly controls 18% of the stock. When Twitter went public, no exec controlled more than a 12 percent of the stock and the company lacked a visionary founder and leader like Bezos, Spiegel or Zuckerberg. At the time of Twitter’s IPO, company co-founder and current CEO Jack Dorsey wasn’t even an employee (he joined the board).
The thing that may challenge Snap’s ability to stay the course is not necessarily going public or the stockholders. It’s Instagram.
Blakely worries that if Instagram figures out its Stories user interface, it could easily beat Snapchat. Even without massive Instagram Stories changes, he sees “a very slow migration to Instagram. Once someone tries Instagram, they stick with it,” he said.
Snap’s own S1 shows that growth started slowing down when Instagram introduced Instagram stories. If Snapchat’s growth continues that trajectory or stalls altogether, a fact that Snap will have to report every single quarter, the company will face pressure from shareholders to do something to turn that around.
Brian Solis worries about ‘the ability for the app and the company to remain relevant among the highly illusive and impatient and discerning audience of users.’
Combined with a fickle user base, this could spell trouble for a public Snap.
Solis told me he worries about “the ability for the app and the company to remain relevant among the highly illusive and impatient and discerning audience of users.” Their constant desire for fresh, edgy features could be at cross-purposes with investors’ desire for growth and financial return.
Instagram Stories growth is a chief driver of this concern. “Instagram is incessantly copying the best features of Snapchat and introducing them to broader masses of users and is capitalizing on that,” said Solis.
How a post IPO Snapchat deals with increasing competition from Instagram and other emerging social media platforms will define its post IPO existence. The company will also be judged on its ability to execute an aggressive plan for growth and potential expansion into riskier ventures like an augmented reality version of Snapchat Spectacles.
Blakely applauded most of the work Snap has done thus far on its wearable technology. “Everyone was saying Spectacles was a great idea. I think they did the launch great. Everyone was super interested in it. They did a great job of creating a sense of urgency and demand,” he said.
However, as interest in Spectacles has cooled, Blakely wonders if this was really just a beta test for the next version of Spectacles: A product that will likely be delivered in a post-IPO environment where the appetite for moonshot hardware may be diminished.
Solis thinks Spectacles were “an interesting deviation from Snap’s stated value propositions.” Can a public Snap afford to take the same kind of risk? We’ll have our answer by the summer.