Five Reasons Why Snapchat’s IPO Could Fail

The most obvious reason for Snapchat‘s decision to seek a successful IPO is the fantastic surge in revenues, which increased nearly %600 from 2015 to 2016 and reached more than $400 million. Projected expectations for 2017 are more than 1$ billion, which is astounding for a company that only had a few million in revenue three years ago. In addition, the number of users has also doubled within two years, from 80 million at the beginning of 2015 to about 160 million at the end of 2016. The daily engagement is impressive as well with the average daily user opening Snapchat 18 times a day and using it for 25 to 30 minutes.

However, there are a large number of risk points that threaten the IPO that is expected as early as next month:

1. Losses and expenses grew as well, but expenditure on R&D stayed at a mere 20%. Twitter was spending about 30% on the day of its IPO, while Facebook didn’t invest as much but was at least showing a profit at the same stage. According to LinkedIn, about a third of Snapchat’s employees are engineers, and that hasn’t changed for the last two years. At the same time, sales hires grew by 8%.

For all of those who are worried that Snapchat’s expenditures are only growing and will further increase their losses, here’s a graph that may surprise you. After two years in which they increased their headcount three-fold, Snapchat has reined in their hiring spree. In fact, January shows that Snap even decreased their staff, maybe for the first time ever. Is that a good, lean sign for a company that expects to go public next month?

2. A low growth rate: Growth in revenue and user base between third and fourth quarter is actually relatively low for a growing social network. Revenue grew 29% from $128 million to $166 million between the third and fourth quarters. That is a significant increase compared to 2015, but insignificant for a company based solely on ad revenues in the holidays season, which is considered as the strongest quarter of the year. Indeed, Facebook saw a 19% quarter-over-quarter revenue increase at the end of 2011, the last full year before it went public but, as mentioned above, the company was profitable already back then.

The fourth quarter was low not only in revenue growth but also in an acquisition of new users. In fact, the holiday season was the lowest in this regard, bring only 3.2% growth rate to reach 158 million users, about a fifth of the growth rate it experienced two quarters prior. The fact that Snap’s S-1 was uploaded shortly after Facebook’s yearly 2016 results came out allows us to create a comparison between the two and witness that Facebook’s user-base growth in Q4 was larger than Snapchat’s.

For Snapchat, things began to slow down at the beginning of last August when Facebook launched Instagram’s clone of Snapchat stories. By October, this new feature already had 100 million daily users of its own. The success of Instagram’s clone explains not only the drop in Snapchat’s growth, but why its expansion outside of the U.S is a necessity for an IPO. While Snapchat is mainly an iPhone app popular in the U.S., Instagram has more mileage on Android and has a larger audience outside the States.

Is that the reason Snapchat is in such a hurry to go public? The first rumors about Snapchat’s IPO began a few months ago and expected the IPO to take place as early as the third quarter this year. So, what caused Snapchat to bring forward the IPO six months early?

[graphiq id=”76riUEfGWQ5″ title=”SNAP Inc. Global Daily Active Users” width=”600″ height=”534″ url=”″ ]

3. Much of Snap’s employees’ equity, which is worth more than $3.5 billion, won’t vest until long after the IPO, according to an analysis by The Information. That means the share price could get dinged years down the line. Only about 25% of stock awards granted to employees had vested by the end of 2016. In contrast, at the time of Facebook’s IPO, two-thirds of its stock awards were already vested. In Snap’s situation, employees will have to wait years to recognize a big portion of their compensation and these unvested stock awards, worth billions, will cause dilution, or increase the company’s total number of outstanding shares after it goes public, depressing the stock price in the future.

In addition, the value of Snap employee stock awards has also appreciated less than those of other high-profile tech companies that filed to go public in the past, which means employees haven’t seen much upside to their stock awards before IPO. Snap employees hold outstanding stock awards worth an average of nearly $2 million per employee, but they are expected to take home only a part of it. Most of Snap’s awards were granted in the form of restricted stock units, which require tax payments estimated to be 47% of their full value.

4. Appealing mainly to a younger generation: The amusing, colorful and sometimes silly nature of Snapchat is appealing to a younger generation. Unlike Facebook, which covers the entire age spectrum, Snapchat appeals predominantly to 18 – 34-year-olds. That is ideal for advertisers who seek to aim their campaigns at the younger generation, but bad for a business who aims to grow beyond that age group and find advertisers for older groups as well.

The big question that is yet to be answered, is how many existing users are abandoning the app as they mature. People in their late thirties or older tend to feel that Snapchat is a nature reserve of youth. Moreover, it seems that users are engaging with the app for certain purpose; Younger users visit over 20 times a day and spend around 30 minutes daily on the app, divided into roughly the same amount of time in each instance that they open it, suggesting that they are doing it for a specific reason and not staying on to “surf” around. This is, again, bad for business, as they are less likely to check for a news feed that will provide them organic and sponsored content.

Although Facebook is “not cool” and a place where the parents are, young users will soon find out that they will need other layers of social network that only Facebook provides: a news feed, the ability to search for friends, see their wall and contact them, and with an overall better design. Snapchat may soon find out that it is more a feature of a social network than a social network itself.

5. The quality and volume of employees equity also tells something about the culture and leadership of Snapchat.

According to a Business Insider report from last October, Snapchat suffers from a polarizing culture, leaving many employees frustrated. Set far away from Silicon Valley, scattered between dozens of former residential houses on Venice Beach in Los Angeles, the employees not only feel distant from the management team but also alienated from them. Snapchat acknowledged the problem, mentioning it in the list of risk factors in the S-1 document.

According to Business Insider, Evan Spiegel is depicted as a Steve Jobs-style manager, with an “obsession with secrecy,” according to the piece. Several employees report a lack of communication and transparency inside Snapchat and about what’s in the pipeline, as well as abrupt termination of development groups and layoffs, excessive control over what employees can say about their jobs and titles, and alienation from Spiegel himself, who is rarely seen in the company.

Looking at Evan Spiegel’s popularity on Glassdoor affirms the situation. Spiegel has a 85% approval rate by the employees, one of the lowest among the unicorns.

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Assaf Gilad

An ex-journalist from Calcalist, a leading business and tech news outlet in Israel, I'm now writing about startups for