Opinion

Snapchat’s only way out is an IPO and it will fail

SnapChat logoSocialbakers founder Jan Rezab looks under the hood of the zeitgeist social network and finds a company that might not be all that it seems

Snapchat, claiming to be worth US$25bn – when no one knows how many active users it really has – is going public. Probably serving as the only way the company can actually can make money for its founders and early investors. There is no exit opportunity for the company at the valuation it is setting for the initial public offering.

Benchmarks – only Facebook and WhatsApp

Facebook went public in May 2012 and was worth $104B. It had 845 million monthly active users. But Facebook already had US$1bn worth of quarterly revenue. Snapchat has a tiny fraction of that. Maybe US$50-100m, but nobody knows.

We could also use WhatsApp as a comparative, which cost Facebook quite a buck to acquire. But WhatsApp it can be argued is now several times more valuable than Snapchat, with over one billion monthly active users. It was worth US$22bn.

So what could justify Snapchat’s huge valuation? Definitely not openness, transparency and a direct approach to the market. Snapchat and transparent? No thank you.

Go ahead and look through any public records and you will not be able to find a single official document talking about either Snapchat’s revenues or monthly active users. It has also filed for an IPO confidentially, which companies under US$1bn in revenue can do. There is no information on any Snapchat figures.

Back in November 2015, mutual-fund group Fidelity marked down its then recent investment into Snapchat by 25 per cent.

Fierce competition from Instagram, Facebook and Messenger apps

Snapchat has done some good things though. It has taught us a new, vertical video and photo format. It also became the go-to-cool social platform for young people, and still to a large extent is.

And then Instagram launched Stories. Facebook also launched Stories in Messenger. And you will see that very soon, Facebook will launch more ‘me too’ functionality in the area.

Spectacles to the rescue?

But maybe electronics products are something Snapchat can go after and win big. Snap Inc. might claim: “Actually, we are a fashion camera company doing electronics, and we will incorporate little cameras everywhere.” And while that could be the case, the exclusive publishing into the Snapchat application only means the app would have to remain very, very cool.

Snapchat – downloads still doing great

One thing is clear. People still download Snapchat and so it is able to create an amazing buzz. Clearly, the company’s app store ranking is doing well. However, it is flat in some markets year-on-year and some markets are already showing a small dip.

The question is – even if downloads are great, what is the app engagement like? Do the people that download it really go ahead and use it, or is it just prolonged craze (‘I have to have Snapchat’)? This is not helpful if people don’t actually use it or get it. I have 830 users on Snapchat and only five of them have published stories. This number is 55 on Instagram Stories.

Main app – user activity death?

When I always watch trends, I go around and ask influencers and celebrities on the platforms. Influencers on Snapchat are reporting numbers falling to 50 per cent of original values in Europe. Instagram has a much bigger base to convert into stories. Time will tell – but with Facebook matching the functionalities and showing better scale, we will see where it all gets to.

Snapchat Media app – a chance for the future?

The place Snapchat could dominate is on the publisher side. It could say this is now how people want to consume news, and take a bite out of Twitter in its real-time way of doing things. Basically, Snapchat would curate and create news, while news organisations would start producing in this format. Snapchat could then claim this is the lifestyle way of consuming news around you, and in the scenario it gets to a certain scale, the company could make it.

Why go public? It’s the only way

At this point, Snapchat serves as a great free innovation hub for Facebook – where FB can just take anything it likes, test it and scale it. Facebook has even admitted the great inspiration it has in Snapchat, so Mark Zuckerberg is not likely to buy it despite the speculation.

Any likely exit now would be a down round from original investors valuations. And it is quite obvious the company won’t raise more money in a traditional way. This means the only way for founders to get rid of those investor preferences and convert is via an IPO, and make it look all shiny at that. The firm could even go public and later exit without those preferences marking that it was the only way.

At this point, you have to think – Snapchat better get the lipstick out and pucker up.

Jan Rezab is the founder of Socialbakers and a board member at Goodbaby and Gamee. He was also named in the Forbes ‘30 under 30’. This article was first published on LinkedIn

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