Case study: Snap IPO and transparency

Now some of my readers may be wondering why I have a post that looks into the Snap IPO. It’s a perfectly valid question for a blog that focuses on enabling and giving insights for very early startups or individuals that are exploring options for an entrepreneurial life.

However IPO registrations provide an insight into a company that was previously unavailable. Remember, when you are a ‘startup’ you are impervious to rules that public companies are subjected to. Even when you are fundraising you can tell as much information as you like. Especially if you’re hot property you can probably get away with very minimal information and play investors off each other to drive up valuations (we’ll leave that part for a future article).

Tech exits have tended to veer towards selling privately as opposed to going public – 2016 had the lowest tech IPOs since 2009. Yes 2016 was a volatile year in the wider world, but with money available enough privately, why would you go public?

Before we answer that question, let’s look at the broad numbers that have been released by Snap on their business health – keep in mind this is a company that is aiming to raise around $3 billion, giving a valuation of $20-25 billion. Their daily users is up to 158 million up 48% year-on-year. Snapchat isn’t profitable (yet), net loss widened to $514.6 million in 2016 from $372.9 million in 2015. The kicker is the shares on offer will have no voting rights. The founders will retain full control of the company.

I guess the market will judge if this is acceptable or not. But on the face of it, there is an arrogance in the IPO; asking a lot, with very little promise in return. See it as a payment that lets you back the founders vision.

Let’s go back to my earlier question – why would you go public. If you have a product people like and you are ready for the big time, it’s a lot easier trying to raise money on the markets than privately. But on the flip side you need to be transparent and comply with rules and regulations. For most tech startups that are valued in the billions but not making a profit this could dangerous. Don’t perform and well the market will definitely let you know what it thinks of your company.

But is this a bad thing? Take Facebook, after the IPO their stock took a beating. You could argue that this prompted them to rethink their strategy. Indeed year on year Facebook has become a more profitable company.

However with no voting rights who can tell the founders if they’re actually going down the wrong path? Founders can be passionate and committed to their vision; without any checks they could also be blinded by what the market is tell them (even the VCs have lower voting rights relative to the share of the company they own).

Is that vision enough to stay ahead of the competition? Growth slowed by 82% after Instagram copied their stories function. No doubt things will become fiercer over the coming months and years, but keeping an active and addicted user base will be imperative for their survival (as well as monetizing it through ads etc). A key question is whether it can continue to be hip with younger generation which is relies so much on. Facebook’s success is in part due to their popularity across many generations.

So many questions and such grand ambitions. It will be interesting to see how this builds towards March when the IPO goes live and even more so when the company has experienced the full brunt of the market. The founders have a huge responsibility to bear, let’s hope they succeed. A Snap failure will discourage even more startups to go public, which is a dangerous precedence for the future.

J

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