What are the most surprising things in Snap's S-1? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Terrence Yang, Former Wall Street VP / Former Managing Director @ $1B+ AUM fund / Berkshire 50 attendee, on Quora:
If you haven't been following Snap's progress, the most surprising things in Snap's S-1 are:
- War for Talent Risk. Snap's S-1 rightly lists their ability to recruit talent to work in Venice, California (in greater Los Angeles) as a risk factor. However, the real risk factor is Snapchat's bro culture risk.
- I'm reliably informed that Snap had serious problems persuading great software engineers from Silicon Valley to join Snap in Venice, CA. That was in 2015. I don't know if this is fixed or not.
- Like Uber, Snapchat has a small army of great engineers from China who work all the time. And Snapchat has been more successful recruiting great software engineers from Seattle, etc.
- I'm told Snap uses the "hotter women" in Venice (compared to other cities/regions like Seattle) to lure engineering talent.
- This is not uncommon. Successful startup founders, accelerator partners and investors in L.A. have basically said the same thing to me. Note that this is a tiny minority of successful startup folks in Los Angeles. But it is notable and whenever it used to happen, a voice inside my Harvard Law/SEC-regulated brain would say - "You are a walking lawsuit."
- Snap's DNA has a strong bro culture strain:
- They perpetuated it in their recruiting. I don't see how they recruit the best female, LGBTQ, or even male engineers who don't want to work in a bro culture. Maybe Snap's biggest risk is not having an adult supervisor like Sheryl Sandberg--who graciously but successfully fixed Facebook's bro culture.
- Snap is heavily dependent on Google Cloud (and vice versa), and Snap's cloud costs are very high.
- "Infrastructure Costs Per User. Because Snap is a data-heavy company, it pays a large server bill to Google Cloud Platform every year. The company's Cost of Revenue line item will give a clear picture as to how much the company has to spend in order to serve each user. When Facebook went public, it was spending around $1 per user on infrastructure costs. Most recently, that figure was around $2 or $3 per user. If Snap is already around that level, it could remain a significant cost center that bedevils attempts to break into profitability." (What Matters and What Doesn't in Snap's S-1.)
- Snap spent $400M last year all on Google Cloud, already a huge discount because Snap is Google Cloud's biggest customer. Snap may need to build its own cloud infrastructure like what Facebook and Uber are doing to control costs and have better terms.
- Uber is one startup that built its own cloud infrastructure early. Snap chose not to do this. Could this be related to its inability to recruit and retain great cloud experts? I had coffee with friend ex-Snap VP of Engineering Peter Magnusson (then head of cloud computing at Oracle) about 1.5 years ago and I did not get the sense that he left Snap on anything than good terms. But he was there rather briefly.
- Snap's user growth is slowing faster than Twitter did in 2014.
- Snapchat's daily active users is up 23% from the end of the first quarter of last year. But the user growth in the second half of last year was slower than during the first half. What Matters and What Doesn't in Snap's S-1
- That means Snap's annual user growth is now below 23%. That's horrible for a growth stock. And there is no way in hell Warren Buffett or any other self-respecting value investor will invest in Snap (too expensive, terrible financials, unproven moat). So who will invest in Snap besides mo-mo investors? Because Snap offers zero voting power to investors, no shareholder activist like Carl Icahn will touch Snap.
- We've seen this before with Twitter, which IPO'd on November 7, 2013 at $26 and is currently trading at about $17.70. Check out Twitter's plummeting growth rate before and right after IPO:
- Snap is kind of nichey. Their most active users (under 25 years old) are also the most mercurial. And that's the problem with social media startups. Young people keep switching social media platforms. We've seen this now with Yik Yak, Secret, Meerkat, Friendster and of course MySpace.
- Can Snap figure out a way to attract new users (such as adults) while retaining current ones (who might leave as soon as their parents are Snapping at them or asking them or their friends for Snaps?)
- Snap is stuck with users with low spending power. As soon as we have another recession (like we did in 2000 or 2008), the 12 to 24 year old sector will suffer a drop in their purchasing power -- possibly to the point where they lack money to spend on discretionary purchases. To de-risk, I hope Snap can get a lot of advertising dollars for food and shelter.
- Snap needs to increase its growth rate significantly. Not sure it can. This could be a much smaller company than people had been hoping for. The Information just said on a Snap S-1 subscriber call that this is a company that is very early. If you're early, you need to F****G grow. Period.
- More from The Information subscriber call: (My comments in italics, all errors mine.)
- From Q3 to Q4 2016, Snap had a 29% increase in users. Twitter had a 44% increase Q3 to Q4 right before it went public. But Snap wants a 2X multiple to what Twitter fetched.
- Snap had a slowdown from Q4 to Q1. For a growth stock, that is awful.
- 40% of users are in the U.S. 70 million out of 160 million DAU. ARPU is $2.15 Facebook is $20 ARPU. Snap arguably has room to monetize.
- Lumpiness: Lenses -> huge increase in users and engagement.
- 2016 products - not oriented on new users but about engaging current users (Memories, Specatacles).
- 1/4 of stock granted to employees and management haven't vested because it is younger (many new employees) and because Snap uses a 10/20/30/40 vesting schedule vs. 25 for each of 4 years. This will greatly dilute investor shares, putting downward pressure on the price.
- Twitter, Square were 30-40% at IPO.
- Spiegel gets 3% in new RSUs on IPO. That is a gift to Evan, who already has a lot of stock. It feels quite greedy to me. Not quite Shkreli level, but in the same vein.
- Wow. The Information is completely misunderstanding Amazon's history. In comparing Snap to Amazon, they are saying investors have been very lenient to Amazon. No way. Public investors hated Amazon stock in 2002. Hard to see here but here's a graph:This is why the future of journalism is people with skin in the game. Own the stock or short it. I want to true believers or true haters to explain why they feel that way about the stock.
- Unlike Facebook (low Oculus adoption) and Google (Glass being a disaster), Snap is a software company that can successfully launch hardware products, given Spectacles success. Snap may have a whole suite of hardware products 5 years from now that contribute meaningful revenue.
- Snap's Discover: May not be core value of Snap. Has an audience. Some media companies like Cosmo, Refinery29 and Buzzfeed do great at Discover. Most do not. Hard for Snap to launch Discover as a separate app but Discover may not be that core to Snap.Snap signed deals with Disney, Turner, NBC to get original programming to Discover. This could be big. High quality content, great for ads. But if just a digital piece of overall app, not paying much attention to as much as other ad products.
- Automating ad buying on Snap will help a lot. Right not it is too manual. Snap API is for ads in between user Stories. Adverisers are clamoring for automatic ad buying in other parts of Snap.
- Snap making lots of money with customized Lenses, turning your head into a Taco Bell taco. But what is the value of this?
- Lens is one of the first successful implementations of AR. However overlaying AR on Spectacles hardware is years away.
- S-1 didn't dig into the patent portfolio much. However, Snap did patent a lot of products. Should include near-field communication, IOT (products for the home), etc.
- Snap is great at marketing hardware (see Spectacles) and created an aura of cool. That's not easy to do.
- Snap's M&A strategy is super important. Snap has relied heavily on their stock to acquire companies. Snap made a lot of important technology startup acquisitions. Bitmoji, Spectacles, etc. are all significant acquisitions.
- Search on Snap is perfunctory right now. Snap made an acquisition and hired ex-Google Search people in San Francisco. (Is that because they don't want to move to Venice and work with bros?) Snap's ability to recruit great talent in the Bay Area will be important.
- Snap has sales offices and offices in Western Europe, Australia. How effectively can you monetize international audiences?
- Facebook - North American audience is 19% but revenue is much bigger.
- Snap has no aspirations to connect the world. They want to provide a fun, cool product. (That's why the S-1 pitches Snap as a camera company.)
- What does it mean that Snap is a camera company? Snap is trying to say it is not a social media company. That won't really work because you are selling ads to show to your users. Don't pay too much attention to the idea that Snap is a camera company.
- Snap price and Facebook overreach in its IPO. Snap IPOing at $20B to $25B valuation. Depending on how you count shares, they might not have to issue price at much of a premium. Snap already issuing shares at $20B valuation (not counting Evan's 3% IPO RSU bonus, etc.) Without changing the price much from where Snap is already offering its stock, they are already there at $20-25BN IPO price. So it's very doable.
- Benchmark, Lightspeed - own 20% of Snap. Lockup period for investors and founders, etc. is SHORTER than typical. 4-5 months for most stockholders. This is another very pro-founder term.
- Unlikely Snap's VIPs will sell all their stock as soon as they get a chance. They can. It's horrible optics.
- Snap voting control. You as public investor are betting on the founders to reach numbers that are not on near-term horizon that would justify the current valuations. Been a long time since Snap gave investors voting rights or other protections. Snap has had full control for a long time.
- Snap has many, many advantages over Twitter. Daily active users, video ads, engagement times, etc. Snap is already larger than Twitter in the U.S. especially on DAU level. But potential growth is tough. Is Snap the next Twitter? Still a question worth asking where S-1 doesn't really address that. Can Snap really monetize its user base.
- Bobby Murphy, Snap CTO. Bobby is very understated. Willing to mix it up with lower level employees, eating in cafeteria. Evan's security detail mentioned in S-1. Not Bobby's. (Why?) Bobby is CTO and leads SnapLabs division, building products that will become important overtime, by attaching emoji to your Snaps. That's very important (and does not sound like adding a fucking mustache that moves as you move your face like in the show "Silicon Valley" at all!)
- Evan/Bobby relationship vs. Larry/Sergey? Bobby is much lower profile than Evan, who's already pretty low profile. No indication of any issue between the two founders. Presumably they fight and make up well, like Larry and Sergey.
- Snap having issues getting CPG brands. Snap is great for movie trailers, etc. Unclear if car companies, P&G will find great value running ads on Snap. Some don't spend more than one second on an ad. 60% of ads are sound on for Snap, unlike Facebook. Expect advertisers to pressure Snap to prove with metrics that ads are actually effective. This is a big risk and can propel or hurt Snap.
This question originally appeared on Quora. the place to gain and share knowledge, empowering people to learn from others and better understand the world. You can follow Quora on Twitter, Facebook, and Google+.
More questions: