There's a long list of buzzy startups with the potential to go public this year but, until the SEC paperwork is filed, it's all just smoke and mirrors. Rumored names on the initial public offering (IPO) docket for 2017 range from Dropbox and Spotify to Peter Thiel's controversial data mining startup Palantir, and mobile app giants Airbnb and Uber (don't hold your breath on those). The IPO market is so uncertain that application performance management (APM) company AppDynamics, which was set to be the first big tech IPO of the year, was scooped up by Cisco for $3.7 billion the day before its scheduled offering. The one tech startup we can say with certainty will go public very soon, and in a big way, is Snap Inc.
There is a lot to unpack in a Snap IPO. But, before we even get into the valuation numbers, share breakdown, and all of the interesting tidbits in the S-1 filing—Snapchat usage stats, acquisition details, cloud costs, and plenty of fascinating insight into the inner workings of the previously secretive startup— it's important to explain what Snap the company actually consists of.
Back in September 2016, Snapchat rebranded as "a camera company" under the newly incorporated "Snap Inc." banner. Snap's portfolio includes both the flagship ephemeral social media messaging app and Snapchat Spectacles, the playful connected "sunglasses that snap," which are still notoriously difficult to get. Snap is going public on the strength of its coveted teen and millennial user base and, with a grab bag of possible revenue streams, including a variety of advertising options, potential hardware sales, and a growing catalog of original content from media partners.
While there is significant Silicon Valley and Wall Street skepticism around Snap's long-term profitability, the latest estimates based on Snap's updated SEC filing puts its potential valuation somewhere in the range of $18.5-$22.2 billion, which still makes it the biggest tech IPO since Alibaba in 2014. Here's what we know so far.
Breaking Down the Snap IPO
Let's start with the biggest details out of the filing. Famously secretive about its revenue and user growth, at long last Snap bared it all.
The Financials: Snap's revenue has grown markedly over the past few years, and so have its losses. Snap generated $404.5 million in revenue in 2016, a $345.8 million jump from the $58.7 million the company made in 2015.
At the same time, Snap amassed net losses of $514.6 million in 2016, up from $372.9 million in 2015. The filing warns (because legally it has to), that Snap "may never achieve or maintain profitability."
In the updated filing released on Thursday, Feb. 16, Snap said it expects to raise as much as $3.2 billion from the offering of 200 million Class A shares. The offering is expected to be priced between $14- $16 per share. As for its valuation, the company's initial filing put the target range between $20 billion and $25 billion, but an updated filing has lowered that slightly to somewhere in the $18.5-$22.2 billion range.
A few other financial and IPO data points:
- Snap's global average revenue per user was $1.06, for September-December 2016, up 31 cents year-over-year
- A whopping 98 percent of Snap's revenue in 2016 came from advertising
- Snap chose the New York Stock Exchange (NYSE) over NASDAQ, and will list under the stock ticker symbol SNAP
- Snap will have approximately 1.16 billion shares outstanding after the offering
- The IPOs underwriters include Morgan Stanley, Goldman Sachs, JP Morgan, Deutsche Bank, Barclays, and Credit Suisse
- Snap's next pre-IPO step is a marketing road show making stops in London, New York, Boston, and San Francisco before officially pricing its IPO when the U.S. market closes on March 1
User Numbers: In the fourth quarter of 2016, Snap counted 158 million daily active users (DAUs). User growth is steady, but began to decline over the course of 2016. Users grew by 60 percent and 66 percent in the first two quarters of the year, respectively, but dropped to 55 percent and 46 percent, respectively, in Q3 and Q4 2016.
How did Snap explain the drop-off? The filing pointed to "performance issues" from one of its product updates on Android and "increased competition" from companies that "launched products with similar functionality to ours." This, of course, refers to Instagram Stories.
Mark Zuckerberg famously offered Snapchat founder Evan Spiegel $3 billion to buy the app back in late 2013; Spiegel declined. Zuck has since been on a vendetta to systematically destroy Snap by shamelessly copying its features and eating into its market share. Instagram Stories launched in August 2016 to that end, copying Snapchat's ephemeral messaging and fun face-mapping filters. According to a TechCrunch report, this has caused a dip in Snapchat Story engagement of anywhere from 15-40 percent. WhatsApp, another Facebook property, launched the new Status tab this week as yet another Snapchat feature clone. Facebook is relentless.
That said, Snapchat's user engagement is still insanely high. According to the IPO filing, Snapchat's 158 million daily active users open the app an average of 18 times per day. Now that's social media addiction. Most of Snapchat's user base are 18-34 years old and live in North America, which is home to 69 million or about 43 percent of the company's DAUs, while Western Europe accounts for 53 million DAUs. Snap hasn't made much progress in Asia or other international markets.
Snap Comparison: Facebook vs. Twitter
To put these revenue numbers and user statistics in context, let's use a scale: Facebook as the best-case scenario and Twitter as the worst. In the year before Facebook went public in 2012, it had $4 billion in revenue. Twitter had $534.5 million in revenue in the 12 months ended Sept. 2013 before its IPO. Snapchat had $404.5 million in revenue for 2016. Facebook was already well in the black before it went public. Twitter, on the other hand, lost $79 million compared to Snap's $514.6 million.
Facebook generates on average $62 from each user in North America, while Snapchat generated about $5.64 last year from each of its North American users, as Bloomberg pointed out. On the DAU front, Snap falls in the middle but closer to Twitter. Snapchat's 158 million daily active users compares to 483 million DAUs for Facebook before its IPO (and 845 million monthly active users), and Twitter's 218 million monthly active users. Snapchat passed Twitter in DAUs in 2016.
There are numbers to support both comparisons, but on the whole, Snap's S-1 filing looks a lot more like Twitter. In terms of sheer company size, the IPO filing revealed that Snap employed 1,859 people as of Dec. 31, 2016, compared to 2,000 pre-IPO employees for Twitter and 3,200 for Facebook.
"To me, Snap is Twitter 2.0—a company with a strong growth rate that is losing a ton of cash, coupled with a massive valuation," Brian Hamilton, the chairman and co-founder of financial analysis company Sageworks, told Vanity Fair's Hive.
Shareholder/voting structure: One of the most curious aspects of Snap's IPO filing is the insight it gives us into the company's power structure. CEO Evan Spiegel and co-founder Robert Murphy (Snap's CTO) each own 21.8 percent of Snapchat Class A stock for a total of 43.6 percent. More importantly, Snap isn't giving shareholders voting power. The filing states that even if CEO Evan Spiegel or co-founder and CTO Robert Murphy get fired, they may be able to retain control of the company. The voting control is even listed in the Risk Factors section of the filing.
As Fortune points out, no other company has gone public with non-voting stock on a U.S. exchange. Facebook and Google's dual-class stock structures allowed shareholders to vote," even if the votes were mostly meaningless against their founder' preferred super-shares." Facebook has since created a third, non-voting class of shares.
Aside from the founders, Snap's outside stock ownership matches up with its venture capital (VC) funding. Snap has raised a total of $2.63 billion in VC funding since 2011, the most recent being a $1.8 billion Series F funding round in May 2016. Benchmark Capital Benchmark is the largest outside shareholder with 12.7 percent of the Class A stock, followed by Lightspeed Venture Partners (LSVP) with 8.3 percent. Next to Spiegel and Murphy, Snap's outside board members include Benchmark partner Mitch Lasky, Intel's Christopher Young, Stanley Meresman of Trident Capital Cybersecurity, along Scott Miller, Alan Lafley, Michael Lynton, and Heart Corporation's Joanna Coles, the only female board member. As the filing reveals, Coles was also the lowest paid board member by a sizable margin.
11 Other Things We Learned in the S-1 Filing
Snap's S-1 also provided us with a smattering of surprising details about everything from how much Snap has paid for various acquisitions, to the hefty chunk of change it shells out to Google and Amazon for cloud infrastructure costs, and even how much Evan Spiegel's bodyguards cost. Below are X of the most fascinating and eyebrow-raising tidbits.
1. More Spectacles Are Coming
Snap doesn't give too much specific detail about its long-term plans for Spectacles, but the filing does note that "we plan to significantly broaden the distribution of Spectacles" and plans to "make substantial investments" in wider marketing and distribution in 2017. As it turns out, Snap decided to kickstart that wider distribution this past weekend by making Spectacles available for online ordering, with delivery withing 2-4 weeks.
So far, Snap notes the Spectacles launch "has not generated significant revenue," which isn't surprising given the viral, guerilla-style limited rollout of the glasses. Now that Spectacles will begin rolling out wide over the next month or so, we'll see if they can move beyond a marketing splash to diversify Snap's portfolio and into an actual revenue-generating product.
The filing does also note that Snap has "limited manufacturing experience" and relies on only one contract manufacturer to build Spectacles, adding that its supplier "is vulnerable to capacity constraints and reduced component availability." Given the high degree of difficulty for startups producing hardware, we'll see if Snap's wider Spectacles manufacturing and distribution operations can avoid getting crushed under the weight of a vicious cash flow cycle.
2. M&A Costs
Snap's S-1 revealed that it paid $150.6 million for Looksery in 2015 to fuel its popular augmented reality filters and face-mapping technology. The startup also dropped $64.2 million for Bitstrips, which powers the popular Bitmoji avatars within the Snapchat experience. Snap also paid $114.5 million for Vurb, a deep linked mobile app search company. Snap's other acquisitions include:
- 2016: $47 million for computer vision company Obvious Engineering
- 2016: $30 million for Israeli augmented reality e-commerce startup Cimagine Media
- 2014: $50 million for QR code startup Scan (powers Snapcodes)
- 2014: $15 million for smart glasses frame startup Vergence Labs
- 2014: $30 million for cross-platform video chat software AddLive, Snap's first acquisition
3. Cloud Costs
Snap's biggest cost of operation by far is the infrastructure-as-a-service (IaaS) subscription costs it's paying for cloud and data hosting to Google Cloud Platform (GCP) and Amazon Web Services (AWS). In the filing, Snap states that it is contractually obligated to "spend $2 billion with Google Cloud over the next five years and have built our software and computer systems to use computing, storage capabilities, bandwidth, and other services provided by Google."
Snap's updated filing added that it's also committed to AWS. "We have also committed to spend $1 billion with Amazon Web Services over the next five years for redundant infrastructure support of our business operations. In the future, we may invest in building our own infrastructure to better serve our customers," the filing states. The Amazon contact starts with a commitment to spend $50 million per year in 2017, rising to $350 million per year from there. Cloud hosting costs add up, and Snap's cloud bill for 2016 was higher than its revenue.
4. Snap's Competitors
The IPO also forces Snap to put on paper the companies it considers to be its competitors. In the U.S., the company listed Apple, Facebook, Instagram, WhatsApp, Google, YouTube, and Twitter. In Asia, Snap sees Kakao, Line, Naver, Snow and Tencent as competitors.
5. Snap Writes Like a Millennial
One aspect of the IPO filing that surprised Wall Street is the conversational tone of the S-1. Throughout the document, you come across phrasing like "our server bills were getting expensive…so we realized we needed to start monetizing—and fast." Later in the filing, the company describes its team as "kind," as in, "the type of kindness that compels you to let someone know that they have something stuck in their teeth even though it's a little awkward."
When describing the personal connection users feel with their smartphones, it says, "We eat, sleep, and poop with our smartphones every day." Snapchat is a social experience for the young, hyper-connected generation, and the S-1 filing drops any pretense and gets to the point. Throughout the document, you can find words including "selfie," "sexting," "party goat," and "barf."
6. It's "Not a Sexting App"
The IPO filing explicitly states that Snapchat has moved beyond early stigma as a 'sexting app.' The filing states: "When we were just getting started, many people didn't understand what Snapchat was and said it was just for sexting, even when we knew it was being used for so much more."
7. It's Intentionally Hard to Use
Snap knows its market. The app is intentionally difficult to use, with hidden features and menus stashed throughout the user interface (UI). Snap doesn't see this as a problem.
"Just because products are sometimes confusing when they're new doesn't mean we are going to stop building innovative products for our community," the filing states. "Part of the joy of using Snapchat is discovering new features and learning how to use all of the products that we create."
8. Some Good 'Ol Nepotism
As BuzzFeed discovered when it combed through the filing, Snap paid $890,339 on personal security to protect Spiegel in 2016. The company has also paid around $650,000 for legal work in the past three years to Los Angeles corporate law firm Munger, Tolles & Olson, where Spiegel's father John is a partner. Finally, Spiegel borrowed $15 million from Snap in February 2016, on top of $5 million he had previously borrowed from the company, according to the prospectus. He repaid the loans before the end of the year.
9. Content, Content, Content
In a newly released video to promote the pre-IPO road show, Snap's CTO Murphy said "Just about everything in the app is ordered around content creation. Sixty percent of Snapchat's 158 million daily users create content in the app every day." This also includes a growing stable of original and even scripted content from media partners.
Snap has an exclusive deal with Turner to produce original CNN and Bleacher Report content for Snapchat, along with sporting events like the NCAA March Madness tournament. Snap also has deals with the Discovery Channel to bring properties like Shark Week and Mythbusters to the app, a partnership with Viacom on MTV and Comedy Central content, an original content partnership with Disney starting with ABC's The Bachelor, and a partnership with NBC that recently bore its first fruit: a Saturday Night Live-branded video short called "Boycott."
10. Spiegel Gets His Zuck On
When Snap goes public, Spiegel will receive an additional 3 percent of the company. According to Recode, that means an extra $750 million IPO bonus for Spiegel. The board granted that stock to him in 2015 "to motivate him to continue growing our business and improving our financial results," according to the filing.
Upon the IPO, Spiegel's salary will be reduced to $1, a move straight out of Mark Zuckerberg's playbook. Zuck did the same thing after Facebook's IPO in 2012. If Snap's valuation hit the high end of initial projections and reached a $25 billion valuation, Spiegel's shares will be worth nearly $5.5 billion.
11. 'Til Death Do Them Part
As the final comic wrinkle in Snap's voting structure, Spiegel and Murphy even retain control of the company for nine months posthumously in the event of their death. No joke.