Pando

Skepticism creeps in over Snapchat’s potential blockbuster IPO

By Sarah Lacy , written on December 19, 2016

From The IPOs Desk

Last November, I argued Facebook’s horrible, awful, very bad, no good post-election November was to Snapchat like the Trump Campaign’s “GRAB ‘EM BY THE PUSSY!” moment was to Hillary Clinton.

[Facebook’s recent scandals] all come down to trust, which has always been long been a weak spot between Facebook and consumers…

...Now reconsider the warning of an “investment year,” and Facebook suddenly looks human. It suddenly looks vulnerable...

...If you must have the curse of having Facebook as a public market comp, the timing couldn’t be better.

Wait, I take it back. It could last up until the IPO early next year. If you are Snapchat meeting with bankers watching this you have to feel a bit like the Hillary Clinton campaign did when the Access Hollywood “grab ‘em by the pussy!” video came out. Sure, it’s great… but can we extend the shock and scandal of it all the way until November 8?

Indeed.

Just a few weeks ago when I wrote those words, Snapchat was coming off the spectacular Spectacles launch, and set to be the first decacorn to go public in early 2017. It was, seemingly, breaking with the Valley tradition since the Google days of putting off an IPO as long as possible. Which wasn’t a huge shock because everything about Snap was a orthogonal reaction to what worked for a company like Facebook.

But as that IPO draws nearer, and the Facebook scandals don’t necessarily go away, but normalize, skepticism over Snapchat’s potential blockbuster IPO is again creeping in.

First there was some mixed news in a talk WPP CEO Martin Sorrell did at the UBS Media and Communications Conference on December 6.

On the upside: He said that Facebook was clearly concerned about Snapchat’s rise, saying “[Facebook has been] trying to undermine Snapchat. Clearly there is some concern [by Facebook] about the penetration Snapchat is getting,” according to the Journal.

He talked up the appealing nature of their young, concentrated demographic, which has WPP spending some $70 million per year with Snapchat on behalf of its clients.  

On the other hand, he also talked to the growing dominance of Google and Facebook-- some 75% of digital spending overall. Last year, it spent $4 billion with Google and plans on increasing that to $5.5 billion this year. Last year, it spent $1 billion with Facebook and plans on increasing that to $1.7 billion this year. Facebook is poised to pass the Murdoch properties to become WPP’s second largest spend.

Investors have already expressed wonder that Snapchat expects to grow revenues from $366 million this year to nearly $1 billion next year. It will need to continue growing rapidly to grow into that valuation, expected to be between $20 billion and $25 billion. And Snapchat will have to steal marketshare from someone to post that kind of growth. Sorrell says he expects the ad space overall to grow 3% next year.

Facebook and Google clearly are continuing to steal from others.

Digiday has reported that viewership and ad enthusiasm for Snapchat’s Live Stories has been flat for the last year, as a result of Live Stories and Discover content being pushed lower on the Stories page last October.

Instead, very high-priced custom campaigns are fueling the site. From Digiday:

Indeed, advertising in-between user stories and sponsored lenses and geofilters is more popular among advertisers. They’re pricier, too, as some lenses can cost more than $750,000, with price quotes sometimes going as high as $4 million for day-long lenses around big events, as Digiday previously reported. While prices for Live Stories vary by event and topic, one buyer said a recent takeover for one Live Story — three ads — cost $250,000.

Indeed, that squares with what we’ve heard from the roadshow: Snapchat has no intention to grow to 1 billion users. It’s going to monetize the fuck out of 150 million to maybe one day 400 million users.

Most of the agency executives were bullish on Snapchat’s continued growth and potential. But Digiday did add this from one:

One agency executive said for all of his company’s accounts, Snapchat is a place where clients look to invest $300,000 to $500,000 for one or two big campaigns each year. “Without a clear, repeatable path to consistent ROI, without scale, it’s truly an experiment and will stay that way until both or either changes,” said the exec.

As WPP’s Sorrell noted the plus Snapchat has is that young demo it’s putting all its $25 billion worth of eggs in.

Which brings us to recent bearish note #2: The enthusiasm around a new app called Houseparty. It grew out of the ashes of Meerkat, so the team has some scar tissue around being “the hot app” and the expectations that come with it.

Even still, they are undoubtedly hot right now. They just raised a $50 million round hotly fought over by VCs and won by Sequoia. When that round was announced last week, everyone covering it had their own special Houseparty metric they wow’d over.

From the Journal: Houseparty was the top social networking iPhone app in May, now #2 behind Facebook Messenger -- which obviously has quite an installed base to draw from-- and one slot ahead of Facebook, according to App Annie. It’s #7 among all free apps on the iPhone.

From BusinessInsider: It’s usage has surged over the school year, with users opening it 5.5 times a day on average.

And from Forbes: It has over one million daily active users, 60% of whom are under the age of 24.

Houseparty is a video group chat app, which is interesting because group-chat was a feature that Snapchat put off. Reportedly, Evan Spiegel worried it would feel “cool kid” and exclusionary. Indeed, the beauty of Snapchat is you don’t really know if you are being left out. Someone may just not be very active, or they may not be including you.

It’s funny that Houseparty’s co-founder and COO Sima Sistani described Houseparty’s group chat as a reaction to the “popularity contest of social media.” Wait, wasn’t that Snapchat?

From her interview with Forbes:

“We built Houseparty because we feel strongly that people are looking to get past the online popularity contest of social media,” Sima Sistani said. “So much of it has become about showing off, the amazing thing you just ate, the amazing place you just traveled to or presenting a fully curated and ‘filtered’ version of one's life. We realized that many people just want to find new and more authentic ways to connect with the people they love.”

For what it’s worth, Houseparty seems to get the appeal of building a product that multiple demographics like, unlike Snapchat which said that early on, but has sought to optimize its site for millennials with Discover. Also from the Forbes interview with Sistani:

I think that kind of casual spontaneity is a huge part of the appeal with users in the 16-24 year age range, but we actually shared our very first proof of concept with our families, and knew immediately that we were onto something when our younger siblings, cousins, parents and even grandparents were all into Houseparty and as excited about it as we were. We definitely see it as a universal product.

Clearly-- for now-- this is resonating. And, to be fair, to Meerkat, its cooling was aided by Twitter purchasing its competitor Periscope and blocking links from Meerkat. Still, hot apps fade all the time. But if the next “Snapchat” isn’t Houseparty, it will be someone. Snapchat has to know that someone will do to it what it did to Facebook.

That could be one reason Snapchat is getting more aggressive headed into its IPO. Fortune reports are it’s going on “a huge hiring binge,” with more than 150 open positions. It “only” employs 900 right now, small for a company valued at some $20 billion. Some of that is focused on European expansion, as a little more than one-third Snapchat’s users are mostly in the US and Canada. And according to BusinessInsider, Snap has been in talks to buy everything from drones, wearable cameras, and AR/VR companies.

From that article:

For example, Snap Inc. has talked with Berkeley-based drone company, Lily Robotics, over the last few months. No deal is on the table, according to multiple people familiar with the matter, but that doesn't mean it's ruled out in the future either.  

Snapchat also talked with wearable camera company Narrative about an acquisition, according to other people familiar with the situation. The talks also fell through with the Sweden-based company, which briefly shut down its operations before recently starting up again.

Both deal talks point to the newly-rebranded company's investment in its new mission statement: "Snap Inc. is a camera company."

Snap Inc: The camera company that is also trying to be a millennial CNN with Discover? I don’t think that mission is as focused as Snap lets on. Still, Snap is smart to let this stuff leak out pre-IPO given the Spectacles success, which was also came from an acquisition. If it’s not even aiming to compete with Facebook on users, it will need a broader story in some sense. If that’s not going to be users and demographics, it might as well be devices and real/virtual world expansion of some sort.

Either way, I think Snapchat is smart to go public now, for the same reasons I’ve argued Uber is playing a dangerous game in waiting. Even Facebook needed a second act, and it needed the pressure of being public to find its second act. It even gambled $2 billion on Oculus Rift, hoping that would be a third act. Better to go public, while you are still growing and leading a market.

Yes, it adds pressure. Yes it’s hard. Yes, look at Twitter-- a company living under the burden of an IPO that did too well, and a site that had too narrow of a demographic.

But look at Pinterest too. All the same things can happen when you are private in the unicorn era. At least when you go public, people get to make money and you’ve got a public currency to make big moves with.