Inside Snapchat: The Best Upcoming Tech IPO?

Started as a class project for Stanford University by then-students Evan Spiegel (now CEO), Reggie Brown, and Bobby Murphy, Snapchat has grown to be one of most popular messaging and social media apps. It allows users to take photos, record videos, add text and drawings, and send them to a controlled list of recipients. Photos and videos disappear within seconds (between 1-10 seconds; amount is up to the sender) after the recipient views them.

Snapchat was officially launched in 2012, and is available for both iOS and Android users.

Valuation

To date, Snapchat has raised a total of $1.3 billion in eight rounds of equity funding, with help from companies like Alibaba Group Holdings Inc. (NYSE:BABA) , Benchmark, Coatue Management, General Catalyst Partners, Glade Brook Capital Partners, Institutional Venture Partners, Kleiner Perkins Caufield & Byers, Lightspeed Venture Partners, SV Angel, Tencent Holdings, Yahoo Inc. (NASDAQ:YHOO) , and York Capital Management.

Thanks to the latest round of funding in December of last year, Snapchat has reached a valuation of about $16 billion, putting them in the elite clique of tech startups who have attained a similar estimation. It was announced in February that the company is seeking a new round of funding that would value the company as high as $19 billion.

IPO Buzz

Last May, Mr. Speigel told Re/code at its annual conference that "[w]e need to IPO. We have a plan to do that.” He did not give details on when an IPO would happen, but added that “an IPO is really important.”

Along with this verbal confirmation, Snapchat has been making strategic business decisions over the past few years that hint at the possibility of a market debut.

Back in 2013, the company caught the attention of tech giants Facebook Inc. (NASDAQ:FB) and Alphabet Inc. (NASDAQ:GOOGL) , the company formerly known as Google. The companies offered to acquire Snapchat for $3 billion and $4 billion, respectively. In a bold but smart move, Snapchat turned down both offers, with attention from investors rising exponentially as a result from the decision.

Snapchat has also recently made high-profile hires that could be viewed as IPO preparation. Late last year, the Los Angeles-based company hired Imran Khan, the Credit Suisse (SIX:CSGN) banker who led Alibaba’s IPO earlier in 2014. His title will be Chief Strategy Officer. Khan joins other high-profile hires such as Emily White, formerly of Instagram and Facebook, as COO, and Jill Hazelbaker, who is known for her PR work for New York mayor Michael Bloomberg, U.S. Senator John McCain, and Google.

Ephemeral Engagement

Since its beginning, Snapchat has utilized the idea of engagement, and has made it a priority in their development and business model. Engagement is not new for social media applications. In fact, it is very important to all social media companies, as engagement is the driving revenue factor, besides advertising. Snapchat, however, is approaching it in a completely different way.

Harvard Business School (HBS) Professors Marco Iansiti and Karim Lakhani, offer an interesting perspective on this idea. In an introduction to the elective course “Digital Innovation and Transformation” presented on HBS’s Digital Initiative, a platform that explores the digital transformation of the economy, Iansiti and Lakhani argue that Snapchat “is not just a messaging system, but also a social network, a community, and an ad platform.”

Most importantly, Snapchat is an ephemeral messaging system, social network, community, and ad platform. Their unique, yet increasingly popular application method is a major contributing factor to their success. Even Facebook is trying to live in the moment, so to speak. CNBC reported last year that the company has been working on a competitor called Slingshot, a service that allows videos and messages to appear for up to 10 seconds.

Iansiti and Lakhani continue, arguing that “Snapchat provides a window into this challenging question: what drives value creation and capture in today’s digital economy?” In other words, Snapchat offers a business model perfect for our current digitized economy, monetizing ephemerality in an innovative way.

Advertising

Not only is Snapchat monetizing ideas, but it is also attempting to make money off its intensely high user base, which there are roughly 100 million daily active users, by introducing transient advertisements that disappear after a set amount of time.

This is a basic yet clever business move for the company. The combination of a large user base and high daily activity is a goldmine for advertisers. Snapchat recognizes this fact, and is charging an astounding $750,000 minimum for a day of advertising. By charging per day instead of the usual per click, the company is letting go of the typical internet advertising model.

The price may be staggering for some, but because of Snapchat’s huge, engaged audience—an audience that is compiled mostly of the highly-sought Millennial demographic—their early ad products have attracted big-name buyers like McDonald’s Corp. (NYSE:MCD) , Samsung (KS:005930) Electronics (OTC:SSNLF) , Macy’s (NYSE:M) , and Universal Studios, a part of Comcast (NASDAQ:CMCSA) .

Video

In a time when social media and networking services are changing, Snapchat is a name that sticks out in a video-dominated marketplace. According to a recent Bloomberg report, Snapchat’s is now getting around 10 billion video views a day, with more than a third from its “Stories” feature,

This figure is impressive because Snapchat is mobile-only. In comparison, Facebook has 8 billion daily video views, but this figure includes both mobile and desktop traffic.

The issue of what counts as a video, however, may be a potential problem for the ephemeral messaging app. Snapchat’s videos are only a few seconds long, and most of the videos disappear once they are viewed; the company will need to clarify what they see as a video view in order to accurately paint a convincing picture.

Problems to Consider

Despite all of the company’s positive aspects, Snapchat does not come without controversy.

Because of its ephemerality, Snapchat has constantly been associated with sexting, a news topic that garners wide public attention whenever reported on. To some, the app is a perfect tool for sexting, as any inappropriate content quickly disappears. Because this issue is not new for the company, Snapchat will have to develop a strategy to conquer this inevitable issue.

Also recently announced was the departure of revenue boss Mike Randall seven months after joining Snapchat. He is not the first executive to leave after a brief stay; Peter Magnusson, who was the VP of Engineering, left the company last summer after a 6-month stint. As an IPO conversation continues to circulate, Snapchat must make sure not to lose any other of its high-ranking executives.

Final Thoughts

An IPO for Snapchat would be a great thing. Like other high-profile IPOs for this year, Snapchat has molded itself as a company for the digital age and technology-grounded economy, and huge corporations want in. The company recently scored a deal with Comcast to show highlights from the 2016 Summer Olympics, marking the first time the media giant has agreed to share video of the games.

Snapchat’s primary demographic, smart advertising strategy, and ephemeral business model makes the company quite the IPO catch. Its valuation could definitely spike even higher, putting the company’s potential worth at an amazingly high price. Snapchat, however, must seriously evaluate all of its existing controversies, and will need to generate substantial revenue in order to present a compelling IPO investment rationale.