Snap Is Going Public: 9 Charts on the Biggest US Tech IPO Since Facebook
The US hasn't seen an internet IPO like this in a long time. Whether Snap succeeds or fails will decide the fate of a whole cohort of startups.
The US hasn't seen an internet IPO like this in a long time. Whether Snap succeeds or fails will decide the fate of a whole cohort of startups.
Last week, Snapchat's parent company, Snap, filed its prospectus. Barring surprises, it will ring the opening bell at the New York Stock Exchange at the end of March.
This is an internet IPO the US hasn't seen in a long time, and the highest-valued listing since Facebook's. Snap goes public at $25 billion, expected to top the listing valuations of internet companies like Twitter, Groupon and Google.
Facebook's 2012 IPO was a turning point for American venture capital: after it, internet companies had a visibly easier time raising money. Mark Zuckerberg, running a company worth more than $100 billion at 27, became an icon for a new generation of founders.
Snap CEO Evan Spiegel, born in 1991, is often called a younger Zuckerberg.
Both came from similar white middle-class families; Zuckerberg went to Harvard, Spiegel to Stanford. Zuckerberg rounded up classmates to build Facemash in his sophomore year; Spiegel got friends together to build Picaboo in his junior year. The two products were later renamed Facebook and Snapchat.
Both dropped out before finishing to start their companies, both fell out with a co-founder soon after, and both turned down enormous acquisition offers. Zuckerberg was 22 when he refused Yahoo's $1 billion; Spiegel was 23 when he refused Zuckerberg's $3 billion.
But they built their companies in very different worlds. When Facebook took off, the iPhone did not yet exist, and Zuckerberg's social network claimed an entirely new market. By the time Snapchat caught on in 2013, Facebook was a public company with a billion users, and Twitter, another social service, had gone public too.
In China, apart from Tencent's WeChat and QQ, you cannot find a third social network with any life left in it.
Facebook holds much the same dominant position worldwide today. Outside China there are 2.8 billion internet users, and four in ten of them open Facebook every day. Its two messaging apps, Facebook Messenger and WhatsApp, have each gathered more than a billion users. Instagram, for photos, has more than 600 million monthly users.
Even so, Snap kept growing. It attracted more users than Weibo or Twitter, and became the largest US internet company to go public since Facebook.
With All These Social Networks Already in Place, How Did Snap Grow?
Because it captured the young.
According to the prospectus, 161 million people now use Snapchat every day, 60% of them teenagers and young adults aged 13 to 24. In the US especially, a country with about 38 million internet users between 15 and 24, more than 90% of them use Snapchat daily.
By comparison, only 39% of Facebook's users are 13 to 24; most are past college age.
The younger the user, the more active. In the fourth quarter of 2016, users 25 and older opened Snapchat 12 times a day and spent 20 minutes there on average; users under 25 opened it more than 20 times a day and spent more than 30 minutes.
Snapchat drew the young from the start. In the fall of 2011, less than two months after launch, it caught on at the Orange County middle school Spiegel's niece attended.
It was then only a photo app: you could send photos to friends in your contacts, nothing more. No photo editing, no beautifying filters. People sent and received more honest messages there. You could give a photo you sent a lifespan of one to ten seconds, and if the recipient tried to take a screenshot, you got a notification.
Facebook was banned at the school, so students began using Snap on their iPads to pass around pictures with notes written on them. To their delight, the pictures disappeared in the end, leaving teachers and parents no evidence to catch them with.
Snapchat's disappearing messages created a distinct way of talking, one that met a need young people could not meet on Facebook, Twitter and other mainstream networks: more private exchange, socializing without pressure. The photos you sent your friends were temporary, not permanent.
That impermanence lifted the burden of playing various social roles and let out a more honest side of human nature — which also made it, naturally enough, a tool for young people to send explicit photos.
Even Spiegel himself said in an interview: "Any time you talk about a photo disappearing from a server automatically, everyone naturally thinks about sexting."
But Facebook's own first feature, back then, was getting Harvard students to rate photos of women. Facebook just grew up later.
When Snapchat was born, Facebook was turning more and more mainstream, and its users increasingly had to manage their own image. In 2012, headlines like "Facebook Ruined One in Five Job Applicants" kept appearing in the press.
Teachers were asked to resign by their principals for posting photos of themselves drinking on Facebook; a Buckingham Palace guard was fired for badmouthing Kate Middleton on Facebook. Stranger still, some companies asked job applicants to hand over their Facebook passwords so they could read everything.
Unlike WeChat, where friendships are made one by one and non-friends see almost nothing, Facebook status updates are public. To hide something from particular people you have to set it individually in the privacy settings, which most people never bother to do. All of this made Facebook a place that needed careful upkeep.
Forbes argued that a younger generation living in an age of Snowden, of parents monitoring their children on Facebook, and of leaked nude photos everywhere, has found more and more to recognize in disappearing messages.
By contrast, internal Instagram documents showed that more than half of teenage users delete what they post if it doesn't get enough likes.
Snap Isn't the Next Facebook — Not Yet
"Snap Inc. is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate." That is how Snap describes itself at the very start of its prospectus.
Putting it that way may be Snap's attempt to keep investors from comparing it directly with Facebook and Twitter, and from judging its future by the measures used on social companies: active users, user growth.
But Snap is a social company. The disappearing videos and photos shot with Snapchat travel only on its own platform. So how many people use Snapchat each day, and how much money it makes from each of them, remain the important measures of whether the company has a future.
By those measures, Snapchat falls well short of Facebook as it was when it listed in 2012.
In its last quarter before listing, six-year-old Snap had 161 million daily users, up 46% year on year. In its own last quarter before listing, eight-year-old Facebook had 483 million daily users, still growing 48% year on year.
Facebook's user base was already three times Snap's, and yet the two grew at almost the same rate. On that reading, Snap has far less momentum than Facebook had.
On revenue and profit, the gap is wider still.
Snap's revenue is growing very fast: $59 million in 2015, $404 million in 2016, nearly seven times as much.
Snap's main revenue is advertising, which it started selling in 2014. Ouija was the first brand to run a video ad on Snapchat. Videos on Snapchat play only while you hold your finger down, ads included, which lets Snap give advertisers more precise numbers on who actually watched.
Snap prices ads unlike most other social services: it charges by the day rather than by impression, with a minimum of $750,000 a day. McDonald's, Samsung and Macy's have all become clients. Advertiser Perceptions ranks Snap first in advertiser satisfaction, ahead of YouTube and Google.
It is worth noting that Snap earned this revenue while losing huge sums: $381 million and $520 million. Its costs also include revenue shares paid to advertising content partners and the expense of producing original ads.
Facebook, when it listed in 2012, had been profitable three years running and made $1 billion in profit in the 12 months before the IPO.
Snap's other problem is that it is too American. In North America alone, the average user brings in $2.15 a quarter.
Worldwide the figure is $1.05. In the fourth quarter of 2016, European users contributed 28 cents each on average, and users elsewhere 15 cents.
What raises still more doubt about whether Snap can earn evenly around the world: in the fourth quarter of 2016, 43% of its users were in North America, and they produced nearly 88% of its revenue.
Facebook was far healthier. In its last quarter before listing — the end of December 2011 — its users worldwide contributed $1.21 each per quarter, $2.90 in North America and $1.40 in Europe.
Snap's revenue growth now comes almost entirely from North America. It has yet to show that young people elsewhere are as taken with it as young Americans and Canadians.
Still, Facebook Feared Snap Would Take the Next Generation of Users — and Copied Four of Its Products
Social interaction has always rested on transmitting information; the richer the information, the more efficient the exchange. You can trace how people communicate almost entirely by watching them migrate between platforms — from text to images to video to short video to livestreaming — with the higher-information forms gradually becoming mainstream.
In each period, tools appeared to make that kind of socializing simpler, easier to reach and cheaper: the messaging tool WhatsApp replacing paid text messages, or Facebook giving people a place to share photos and words.
As smartphones spread and mobile networks got faster, photos and video files moved more and more often. At that moment, Snapchat offered young people a new way to socialize.
In 2011 Snapchat had no photo editing and no beautifying filters; people sent and received more honest messages there. And by design, text and images alike vanished after a set time — the disappearing message.
For the sender, sharing your life got easier; for the receiver, it created the urgency of having to pay attention and watch.
As the product gained features, Snapchat added video in 2012. Open Snapchat today and you land straight on the screen for taking photos and recording video; even in the chat window, the most prominent button records video.
Next to text and images, video is a raw, unfiltered medium. Stories arrived in 2013, letting users caption photos or videos, or splice several photos and videos together into a single story.
In 2014 and 2015, Snapchat began shipping new features faster — fun ones that held young people's attention.
Its filters, for instance, did not make you fair-skinned and long-legged; they went for the goofy. You would not come out prettier or more handsome, only turn into a zombie or a pirate in a video filter. The rainbow-vomiting AR filter Faceu made later came from Snapchat.
But however it changed, Snapchat never gave up the disappearing message.
Building on its 10-second video, Snap released a pair of camera glasses last September called Spectacles, priced at $130 — less than a tenth of Google Glass.
These sunglasses, in showy, cartoonish colors, do exactly one thing: record video. Press the button on the frame lightly and it starts recording. Over Bluetooth or Wi-Fi, the 10-second clips transfer straight to Snapchat.
They are a simpler product than Google Glass, and they got a better start than it did.
In the end, with every improvement to the product, Snap drew more users than Twitter.
Facebook, meanwhile, was taking this rival more and more seriously. On December 21, 2012, it launched Poke. Its defining feature: text, photos and videos sent through it disappeared within 10 seconds of being viewed, and the sender was notified if the recipient took a screenshot. This was exactly Snapchat's core feature.
Spiegel sent a short statement to several outlets: Welcome, Facebook. Seriously.
The line came straight from what Apple said to IBM in 1981, when IBM entered the personal computer market: Welcome, IBM. Seriously. Apple ran a full-page ad in The Wall Street Journal.
Poke reached number one on Apple's App Store download chart on its second day. But by Christmas, December 25, a burst of promotion put Snapchat back at number one, and Poke fell out of the top 30.
"It was like saying, Merry Christmas, Snapchat," Spiegel recalled with a laugh a month later, in an interview with Forbes.
In that same interview, Spiegel also revealed that after Poke failed, Zuckerberg contacted him in the fall of 2013 and offered $3 billion in cash for Snap. Snap was then a two-year-old company with no revenue.
Turned down by Spiegel, Facebook kept trying to copy Snapchat's features.
In June 2014, Facebook launched a standalone app, Slingshot. It let users shoot video and photos, add filters or doodles, and share them with friends. But the app never beat Snapchat, and shut down in December 2015.
A month after Slingshot, in July 2014, the Instagram team launched a standalone app of its own, Bolt. Besides Snapchat's signature disappearing messages, it let you shake the phone to undo a send, and send with one tap.
But because hardly anyone used Bolt, the Instagram team quietly pulled it from app stores later on.
In the end Instagram took the field itself, putting Instagram Stories — a near one-to-one copy of Snapchat Stories — right on the app's home screen.
This time, Snap felt it.
Two months after launch, Instagram Stories passed 100 million daily active users, reaching 150 million by the end of 2016 — almost as many as Snapchat's.
At the same time, Snap's user growth slowed sharply: up 7% from the previous quarter in the third quarter of 2016, and 3% in the fourth.
Snap's quarterly growth had dropped into single digits before, but it always climbed back above 10% the next quarter. This time the growth nearly stopped.
Going Public Isn't the Finish Line, and the Risks After It Are Not Small
On one side, Instagram's blow to Snap has already landed.
On the other, Snap's weak profitability and high operating costs are what worry investors.
The risk-rating firm Rapid Rating scored Snap's investment risk at 47 out of 100, meaning medium risk. Its reason was exactly Snap's poor profitability over the past year: loss rates far above 100% in 2015 and 2016.
Snap also uses its money inefficiently and spends too much running the business. Spread across its users, Snap's $450 million in operating costs comes to $2.86 per user; the same figure for Facebook at its IPO was $1.
That $450 million covers mainly payments for Google cloud services, revenue shares for ad publishers, and the cost of producing original ads.
Most of it is network infrastructure, tied directly to the video distribution Snap provides. And over the next five years, Snap will spend at least $400 million a year on Google cloud services.
Discussing engagement and the makeup of its user base, Snap also warned that it may have trouble winning over people older than 34, and that a fairly narrow user base is one of the risks that could keep it from adding new users.
Snap also has no long-term advertising clients and no single client accounting for more than 10% of its revenue, which forces it to keep finding new users to sustain revenue growth.
Beyond its own operating risks, the competitive pressure from rivals like Facebook and Instagram worries Snap, and will give investors pause too. Companies already huge in users and revenue can copy Snap's core features without embarrassment and hit its business where it hurts.
"If we are unable to retain our current users or add new users, or if our users decrease their level of engagement with Snapchat, our business would be seriously harmed," Snap says in the prospectus.
And in time, the young users at Snap's core today will grow up. Can Snap grow up with them? The way Facebook once did.
Like Google and Facebook, Snap's Founders Keep Absolute Control After the IPO
Snap has three classes of stock: A, B and C. Class A has no votes, Class B one vote per share, Class C ten.
Spiegel and Bobby Murphy, the two founders, together hold 47.6% of the Class A and B common shares and all of the Class C shares. Their combined voting power comes to 88.6%, which gives them absolute control of Snap.
Shares held by Snap's other investors, among them Lightspeed Venture Partners and Benchmark, cannot sway the company's decisions and can only return money. Lightspeed's Snap stake is worth $1.4 billion, Benchmark's $2.1 billion.
Snap's future, in other words, is entirely in the hands of its two co-founders.
Harvard Business Review once counted 212 American startups from the 1990s and 2000s: at three years old, 50% still had the founder as CEO; at four years, 40% still had the founder around but had handed the CEO job to someone else. Fewer than 25% of founders were still CEO at the company's IPO; more often, the company ended up carried along by its investors.
Google broke this choice between money and power. Larry Page and Sergey Brin designed a dual-class structure: Class A shares sold to outside investors, one vote each, and Class B shares held by themselves, ten votes each. At Google's IPO, Brin, Page and Eric Schmidt held 38% of the voting power between them; with the other executives who had been there since the early days, outside capital had no way to influence Google's decisions.
Zuckerberg kept the dual-class structure and also used agreements requiring every investor in Facebook's first ten funding rounds to assign their votes to him. Zuckerberg alone holds more than 50% of Facebook's voting power, which makes it impossible for anything like Steve Jobs's early ouster from Apple to happen there.
For Other American Tech Companies, Snap's Success Matters Enormously
Since Facebook's giant IPO in 2012, US tech companies have not done well after going public. Twitter, Fitbit and GoPro are all worth far less today than when they listed.
The stock market has grown more cautious about tech as a result. Since Facebook, there has been no internet IPO of any great size.
By 2016 even the number of listings had collapsed: 18 US tech companies went public, the fewest in a year since the 2008 financial crisis.
2017 could be the year that count starts recovering, pushing startups valued above $10 billion — Airbnb, WeWork, Palantir, Uber — to launch IPOs of their own.
Among the 20 most valuable startups in the US, 7 have had their valuations cut by their own shareholders in the past two years. Palantir and WeWork, among them, have had layoffs or waves of departures.
For companies that have raised more than a billion dollars, are valued above ten billion and still have no real profit to speak of, going public is the only way out.
The investment bank Union Square Advisors reckoned that, as of November 2016, 90 tech companies were already queued up to list, counting those that had filed or clearly said they intended to. Morgan Stanley estimated that at least 30 tech companies would list this year.
If Snap does badly after this IPO, that will be a real problem.
Charts by: Feng Xiuxia
Cover image from: thefiscaltimes, BusinessInsider, TechCrunch
Translated from the original QDaily article. Original publication date retained.