Story Of The Week

SNAPCHAT – A feature on Instagram

In this global era, who doesn’t want to raise their company’s equity capital instead of raising more funds from venture capitalists? Amidst all the struggles of getting funds from investors and inspite of negative operating profit having an IPO is definitely a good way out.

So, going public is what every private company wants. IPO (Initial Public Offering) is the process that helps to achieve that stage. It is a process by which private companies can go public by selling their stocks to the general public. A company usually goes public to raise capital, profile and to provide liquidity that gives investors, executives and employees the opportunity to cash out their investments.

The recent news of Snapchat releasing its IPO and making itself public has captured all the eyes on the news channels. Snap.inc; the parent company, on Wednesday sold its first share of stocks to public at $17 per share having a market worth of about $24 billion. The day after, Snap closed at $24.48, up $7.48 or 44% from its offer price of $17. Its first day pop was bigger than Alibaba’s, Facebook’s and Google’s, but smaller than LinkedIn’s, Twitter’s and Yelp’s. Snap was the most actively traded US stock on its first day, with more than 215 million shares changing hands today. The valuation now touches $33 billion.

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It is the first US Company that has gone public with shares that will give no privilege to the investors to vote for the functioning of the company. It’s a company that has slowly increased its users with a nascent business model and doesn’t let shareholders to dilute the control.

So how does the structure works?

Traditionally, the investors give their money in lieu of the ownership of the company. But this time something new has come up on the way of investors. So what could be the driving force behind buying this piece of equity is a question to be answered.

Snap.inc offers three classes of shares:

  • Class A: These shares can be bought on the NY Exchange and have no voting rights.
  • Class B: These shares are reserved for executives and early investors. Vote count is 1 per share.
  • Class C: These shares are held by CEO and CTO of the company. Vote count is 10 per share.

This makes it an effective 88.5% control of the company with the Spiegel and Murphy.

It is something that Spiegel and Murphy must have learned from the Mark Zuckerberg who controls 60% of voting rights at Facebook.

Snapchat became one of the fastest growing social networks in the past few years. However, there were rumours of Mark Zuckerberg proposing a deal of $3 billion to own it. But as Steve Job’s famous quote “Good artists copy; great artists steal” goes by, Mark Zuckerberg stole the thunder of Snapchat by stealing the idea of ephemeral pictures and made it even better through Instagram stories, making Snapchat just a feature on Instagram!

The number which Snapchat took 4 years to achieve, was gained by Instagram within a few weeks. Since the launch of Instagram stories, it gained a bandwidth of 150 million daily active users in a tenure of 5 months.

These numbers simply suggest that the Snapchat has lost its uniqueness. The feature which was the USP of Snapchat is now easily available to Instagram users. Further, Snapchat is still operating under losses as suggested by the S-1 filing of the Snapchat. Without a sustainable stream of positive cash flows or operating profits no firm can survive, be it public or private.

The hurdles for Snapchat don’t just stop here because making just an IPO doesn’t complete the story. The real challenge begins when the expectations of the investors meets the share price. Will Snapchat be another success story in the start-up era just like IPO of Facebook and Alibaba which now are worth $115 billion and $231 billion respectively or it will foray into the dark horizons of the start-up world without any sustainable business model. One of the main source of sustainable revenue in digital space is bigger and better Ads Network. Without it Facebook once stumbled upon. So, how Snapchat will make use of it or what new product/ service features it will offer post IPO will surely determine the success or failure of Snapchat.

References

http://www.investors.com/news/technology/will-snapchat-ipo-set-stage-for-stampede-of-unicorns/

http://www.recode.net/2017/2/21/14670314/snap-ipo-stock-voting-structure

http://variety.com/2017/digital/news/snapchat-ipo-coming-1201973231/

http://economictimes.indiatimes.com/small-biz/money/snapchats-ipo-leads-way-for-other-overheated-startups/articleshow/57442509.cms

http://fortune.com/2017/03/02/snapchat-ipo-snap-disaster/

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