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Welcome to slackingoff, where we have in-depth conversations on whatever is particularly interesting. Follow below.

snap crackle pop ๐Ÿ‘ป

snap crackle pop ๐Ÿ‘ป

ameet
What's up Anthony.

anthony
Hey. Did you see the news?

anthony
The Verge
Snapchat creator files for a $3 billion IPO
Five years after the launch of Snapchat, Snap is planning to go public. The company filed for an initial public offering on the New York Stock Exchange today, picking the ticker symbol "SNAP." The...

ameet
Nice, but who in their right mind goes through a secondary source for an S-1? Let's get on the primary life bro: sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm

anthony
I wonder what kind of story Snapchat wants to tell. For almost all companies, an IPO is a branding exercise in addition to a fundraising event. I am gonna bet they aren't going to say they are just another social network.

ameet
I've been waiting for this filing all year. Let's see what we can dig up.

ameet

ameet
Right at the top we know the rules don't apply to these guys. Snap is "reinventing the camera"? I wonder if the metrics bear this one out.

anthony
There are definitely a lot of people of using Snapchat:

anthony

On average, 158 million people use Snapchat daily, and over 2.5 billion Snaps are created every day.


anthony
But how many dog filters does that equate to?!

ameet
A hell of a lot I think is the technical term.


What did you think of this line:


ameet

Our strategy is to invest in product innovation and take risks to improve our camera platform. We do this in an effort to drive user engagement, which we can then monetize through advertising. We use the revenue we generate to fund future product innovation to grow our business.


anthony
A lot of buzzwords but you can see where they start to shape the narrative. The story is Snapโ€™s ability to keep shipping engaging and differentiated products at a high velocity. They've done a pretty good job to date.

ameet
It's interesting that they don't cite network effects as a source of engagement and user retention. I'd guess it's because unlike Facebook, Twitter, or Instagram where all your activity is archived along with your previous interactions with your friends, the Snapchat experience is super ephemeral so you don't feel like your personal history is embedded in the app.


Here's an interesting line:


ameet

We compete for engagement in an environment where anyone can distribute products instantly and often at no cost to the user. We think the best way to compete is to make great products that people will want to use. As such, we invest heavily in product innovation in an effort to drive user engagement. Since we monetize primarily through advertising, incremental user engagement also means increased advertising inventory.


ameet
Is this true? The first part about zero distribution costs is right, but that also means that the biggest players and incumbents (Facebook, Instagram, etc.) can push out features and updates just as quickly as the upstarts and with more resources (and more users to play with the updates immediately). Weird that they said this...

anthony
This is quite the line to include as a risk factor:

anthony

We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.


anthony
Uhh...

ameet
Seriously though:
snapcogs

ameet
People generally assume that tech companies and social networks are cheap to run but that's clearly not the case here, with Snap's Cost of Revenue greater than Revenue for the past two years. Is this because the platform is so video-heavy?

anthony
Videos are expensive to host and serve. Look at the your wireless bill when you try to stream Westworld on the subway. It's like that for Snapchat x 2.5BN snaps/day.


Let's look at it another way, do you want to invest in a company where it costs you $1.12 to make $1.00? If so, Snap is right up your alley.


ameet
I thought I did but am increasingly less certain.


Here's an interesting tidbit (sorry for the long quote):


ameet

Moreover, the majority of our users are 18-34 years old. This demographic may be less brand loyal and more likely to follow trends than other demographics. These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement. Snapchat also may not be able to penetrate other demographics in a meaningful manner.


ameet
I'm surprised their core user base is this "old"; I would have thought they were 12-18 but I guess Snapchat took off a few years ago and that cohort has grown up since then.

anthony
It's a pretty wide age band. I think this gives a better sense of the demo split:

anthony

For example, users 25 and older visited Snapchat approximately 12 times and spent approximately 20 minutes on Snapchat every day on average in the quarter ended December 31, 2016, while users younger than 25 visited Snapchat over 20 times and spent over 30 minutes on Snapchat every day on average during the same period.


anthony
So what do we have here? Older users with money aren't sticking around as much as Snapchat would hope. Can you really build a business on the backs of teens and pre-teens?

ameet
Based on this chart of their global DAU (daily active user) count, it looks like they are betting on doing just that:
sec.gov

ameet
Looking at this graph, wouldn't you also say that growth is _slowing_? The Q/Q growth over the past three quarters was 17%, 7%, and a pretty poor 3%.

anthony
It's not looking great outside of North America. Outside of North America and Europe, user growth was flat.
sec.gov

ameet
This is bad for two reasons. One, slowing growth means that from an advertiser's point of view there's a very low ceiling on who you can reach. Second, the fact that they only disclose DAUs and not DAUs + MAUs like other social media companies means they are clearly trying to shape the narrative around this deal away from the typical metrics.


Check out this gem:


ameet

For example, Instagram, a subsidiary of Facebook, recently introduced a โ€œstoriesโ€ feature that largely mimics our Stories feature and may be directly competitive.


ameet
You can only really say one thing here: lolz.

anthony
Look at Instagram fighting back:
recode.net
Recode
Inside Instagramโ€™s reinvention
How Kevin Systrom got over minimalism and snapped into building mode.

anthony
Also when Recode says building, they really mean cloning Snapchat features in Instagram.

ameet
I enjoyed that article, particularly this part:

ameet

The feature has been a hit with Instagramโ€™s users: 150 million people use Stories every day.


ameet
Instagram's 150 million DAUs sounds suspiciously close to Snap's 158 million DAUs...


It actually reminded me of this part of the S-1:


ameet

Additionally, in mid-2016, we launched several products and released multiple updates, which introduced a number of technical issues that diminished the performance of our application. We believe these performance issues resulted in a reduction in the growth of our Daily Active Users, particularly among Android users and regions with a higher percentage of Android devices. Finally, we also saw increased competition both domestically and internationally in 2016, as many of our competitors launched products with similar functionality to ours.


ameet
First; "many of our competitors" lol such passive aggressiveness from Snapchat.


Second; no matter which way you swing this, this is not good. If Snap is mostly telling the truth, then their engineering/deployment chops are so bad that they pushed out an update that totally screwed their metrics and relationship with these users. If they are not telling the truth, then it means that one quarter of Instagram Stories was enough to make a gigantic dent very quickly.


anthony
Snapchat feels the heat from Facebook and I think they definitely want to use this IPO to help shape the story that they are different.

anthony
Look at Snap's revenue/user numbers:

anthony

Our global average revenue per user, or ARPU, in the three months ended December 31, 2016 was $1.05, compared to $0.31 for the same period in 2015. In North America, our ARPU in the three months ended December 31, 2016 was $2.15 compared to $0.65 for the same period in 2015.


anthony
vs. Facebook's:

anthony

For 2016, worldwide ARPU was $15.98 , an increase of 34% from 2015.


anthony
Evan and Snap can highlight this difference as a positive to show investors what kind of untapped upside Snapchat can look foward to as they continue to mature.

ameet
Even so....we've established so far that Snap's business is super expensive to run, the engagement is questionable, their user growth is slowing in the US and Europe (and non-existent in the ROW), their competitors are taking share, and their monetization has a ways to go. This is not looking good so far.

anthony
And this is before we discuss the corporate governance issues with this IPO.

anthony
First, look at what Snapchat had to say about shareholder control:

anthony

Our two co-founders have control over all stockholder decisions because they control a substantial majority of our voting stock. The Class A common stock issued in this offering will not dilute our co-foundersโ€™ voting control because the Class A common stock has no voting rights.


anthony
I checked with a friend (shoutout to Jerel) and this is the first IPO where there are no voting rights attached to the shares. Other companies including Facebook and Google have share types with different voting rights but this is the first time an IPO will come out with no voting rights at all.

ameet
It's crazy because it looks like the founders Evan and Robert had this super-voting situation going on throughout the entire time they were privately funded by venture capitalists. It's pretty unusual to see even then, let alone for a public company. What it really means is that even after selling a significant percentage of a $25 billion company to outside investors in this IPO, they will still have total control over the company's strategy.

anthony
This puts all your faith into the two founders and their vision for the company. This is great if Evan can turn Snap into the next Google or Facebook but this really sucks if Snap turns into Groupon or Zynga. Even if they run the company into the ground, there will be no way to force them out.

ameet
The best part was this:

ameet

Under the terms of his offer letter, Mr. Spiegel will be granted an award of RSUs for shares of Series FP preferred stock representing 3.0% of our outstanding capital stock on an as-converted basis on the closing of this offering...


ameet
TL;DR; at the close of the IPO, Evan Spiegel gets $750 million in stock for a company that's losing money and doesn't have a clear path towards profitability, let alone growth.

anthony
So the business metrics aren't great and the founders have almost total control of the business. How did the co-founders get all these concessions?

ameet
A few things:


1) The guys who are currently invested in Snap (the VCs and institutional investors) need an exit. If you're Benchmark VC and you've also invested in Uber and WeWork and all these other big "startups" that refuse to go public, you need an exit to get some money in the door so you can cash out and move on. Of course you're going to approve whatever the CEO wants so you can get your liquidity event.


2) So few companies have gone public this year that investors need somewhere to put there money to get some upside, and this is possibly it.


3) The Facebook FOMO is very real. People want to believe that Evan Spiegel is the next Mark Zuckerberg and are chasing that return. Plus I'd suspect that a lot of the investors looking at this deal are a little older and don't totally get the app so they just assume it's some phenomenon they don't totally understand.


anthony
Even with that said, props to Snap going from seed round to IPO in 5 years while companies like Dropbox are entering their second decade still waiting for that ever elusive exit.
This IPO is going to test if what Snapchat is doing can be a standalone business or just another bolt on feature to the Facebook machine.

ameet
Totally, I keep coming back to this quote:

ameet

The first version of Snapchat unlocked an explosion of creativity because deletion by default, our internet-connected smartphone Camera, and new Creative Tools gave our community a visual voice to express themselves in the moment. We learned that creativity can be suppressed by the fear of permanence, but also empowered through ephemerality.


ameet
We'll see if Snap can outlive its own ephemerality.

๐Ÿ’จ ๐Ÿ & ๐Ÿ

๐Ÿ’จ ๐Ÿ & ๐Ÿ

march of the times ๐Ÿ‘Š

march of the times ๐Ÿ‘Š