Leaked emails have revealed fresh details about Snapchat and its 24-year-old CEO Evan Spiegel.
While some of the emails are embarrassing--try opening your inbox to the world and seeing what happens--the emails show for the most part that Spiegel is a formidable, intelligent executive building an addictive service that has the potential to be the next gigantic consumer-technology company.
On the one hand, this should not be surprising. Snapchat, which allows people to share photos and messages that disappear after a short period of time, has already rejected a $3 billion offer from Mark Zuckerberg. It is reportedly raising money at a $10 billion valuation.
Billion-dollar offers don't get thrown at dummies. Goofballs, for the most part, don't build $10 billion companies in just three years.
And yet, Spiegel has often been portrayed as just that--a goofball. This portrayal is largely due to the fact that Spiegel's old emails and messages have become public record. His messages to his frat brothers were sent to Valleywag and make him look like a sexist pig. But this was in 2009, when he was social chair of his fraternity. Spiegel was also sued for cutting out the third cofounder of Snapchat. As a part of that lawsuit, we see emails where Spiegel talks about his "certified bros" who cofounded Snapchat.
But the latest batch of leaked emails tells a different story. They show a maturing executive wrestling with very difficult decisions, impressing people that are twice his age.
Sony Entertainment CEO Michael Lynton had his inbox exposed to the world as part of Sony being hacked. Lynton is a board member of Snapchat. He occasionally emailed about Spiegel and Snapchat's business from his Sony account. After reading through some of those emails, it's hard not to be impressed by Spiegel and his company.
For instance, there is this long email from Spiegel responding to five questions from Snapchat board member Mitch Lasky. In the email, we see Spiegel's thoughts on raising money, as well as his thoughts on the state of the economy.
Lasky forwarded it to Lynton. Lynton says of this email, "I couldn't have written this at 23. Very impressive."
1) I 100% understand your perspective on the raise. That said, I would prefer to keep the valuation of the co at $800mm going into a potentially turbulent time in the market. We have 13 months runway, and with a minimally successful monetization scheme we will be able to comfortably extend that. I don't think that monetizing the business will affect our ability to raise at high valuations--Facebook was bringing in money in the very early days and didn't have any problem attracting high valuations. If anything, we need to monetize the business in order to create leverage for future financings as needed. In the next two weeks I want to focus on the monetization product rather than a potential financing. It's almost there and it's really awesome. If we have a business that is sustainable over the next 2-3 years we will be in a much stronger position. I think 409(a) issues are overstated and that we will benefit from having lower strike price as we hire over next few years. Especially if that price becomes based on revenue rather than VC valuations. I don't think $3bn valuation for fundraising is going to go away--esp because TC and others are already pricing in market volatility. You've seen the data--we have high engagement and high retention product with tremendous growth ahead of us. Monetizing the business now only makes a stronger case for the permanence of our product. I think most important thing I want to communicate to you is that this is not an emotional decision and is not about "proving it"--this business needs to make money. The argument of grow now, monetize later doesn't make sense because we have reached abnormal levels of growth and our monetization product is value-added. I'd rather not burn another $100mm of OPM before we find out whether or not we have a business. If we can build profitable biz w Twitter-scale, 30-person headcount, and major growth ahead we are not going to have a problem attracting additional capital. (This does not preclude necessity of building a much larger team).
2) I completely agree. Not interested in Zander. I am working with Daversa on CAO/COO role and meeting with 4 terrific candidates this week. Will report back on those meetings. As far as GC goes, I have my dream candidate and I think we can make it happen. I am calling him today to discuss but don't feel comfortable bringing him on until we are making money. We will be able to attract best (and risk-adverse) candidates if we can show a path to real revenues. I am moving Philippe to internal operations (we can discuss this on the phone, please do not discuss with him as I have not yet had this conversation with him) and I think he will be able to monitor cash flow while we look for CFO or VP Finance. We're not doing anything fancy--we just need to know if the amount of money in our accounts is increasing or decreasing. We have outsource CFO resource in Keating Consulting and the combo of Philippe Keating will get the job done for now.
3) We texted last week, planning on calling him today.
4) Talked to David this am, sounds like Jeremy will be following up with Tencent later in the week. David seemed to think deal could get done. As I mentioned earlier, I don't care either way but we would probably have to offer it to all shareholders to avoid potential lawsuit down the road. Could be more trouble than it's worth.
5) Happened at 10am.
As a note: my view of the market is as follows --
Fed has created abnormal market conditions by printing money and keeping interest rates low. Investors are looking for growth anywhere they can find it and tech companies are good targets--at these values, however, all tech stocks are expensive--even looking at 5 years of revenue growth down the road. This means that most value-driven investors have left the market and the remaining 5-10% increase in market value will be driven by momentum investors. At some point there won't be any momentum investors left buying at higher prices, and the market begins to tumble. May be 10-20% correction or something more significant, especially in tech stocks. Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars -- largely due to mobile advertising performance - especially App Install advertisements. This is a huge red flag because it indicates that sustainable brand dollars have not yet moved to Facebook mobile platform and mobile revenue growth has been driven by technology companies (many of which are VC funded). VC dollars are being spent on user acquisition despite unknown LTV of users--a recipe for disaster. This props up Facebook share price and continues to justify VC investment in technology products based on abnormally large mkt cap companies (i.e. "If this company attracts just 5% of users that FB has, it will be HUGE"--fuels spend on user acquisition as user growth is tied to values). When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease--compounding problems for Facebook and driving stock even lower. Instagram may be only saving grace if they are able to ramp advertising product fast enough. Total internet advertising spend cannot justify outsized valuations of social media products that derive revenue from advertising. Feed-based advertising units will plummet in value (in the case of Twitter, advertising spend may not move beyond experimental dollars) similar to earlier devaluing of Internet display advertising.
THAT SAID, we are still in very early days in mobile application market. I remember growing up wishing I had been a part of PC revolution--and I feel very fortunate to have the opportunity to watch smartphones take off. Snapchat has become one of the top 5 mobile phone brands with Facebook, Twitter, YouTube, and Instagram.
For Snapchat to capitalize on market conditions in next 3 years, it is imperative that we become a revenue-generating company. That will allow us to attract the best talent and prosper despite extreme scrutiny on traditional social media that will have failed to deliver on $$$ dreams. Team is working overtime to drive revenue and innovate on core product--we have a solid 3-year roadmap that we intend to follow.
As a profitable growth company with a focus on mobile we will not suffer from opportunities to raise capital at outsized valuations despite market conditions. Strategically it is important for us to keep expectations low with an understanding that Snapchat may be valued on revenues going forward and that $800mm valuation for a two year old company is remarkable and already more than enough to grow into. With 13-15 months of runway extended by minimally successful revenue generation activities I think we are positioned to capture the mobile communication market.
I disagree wholeheartedly with the notion that mobile will be forever fragmented--we are the only differentiated messaging service in the United States and we will continue to provide a unique and innovative product experience. Snapchat is not valuable in the long-term because it is used by teens or because it is a threat to Facebook. It is valuable because it has fundamentally changed the nature of digital communication. Our focus in the immediate term is revenue generation, growth and product development.
Lynton wasn't the only top executive impressed by Spiegel. Twitter CEO Dick Costolo raved about Spiegel in emails.
"I'll stop making all of our conversations about Evan, I promise, but I thought this was just wonderful and told him as much yesterday," Costolo said in a message to Lynton, linking to a speech Spiegel delivered. Costolo continued, "I really think he is one of the best product thinkers out there right now. Thoughtful, understands what the shifts in the landscape actually mean for people, clearheaded about what the implications are for product and design. Great."
In another email, Jerry Murdock, cofounder of venture firm Insight Venture Partners, raves about Snapchat's success. All typos are his:
"I am not overstating it when I say that Snapchat's utility requires hours of your time a day. Kids get dozens of snaps during peak chat times. If you are on the app it's how you communicate with all your 'friends.' Snapchat's stickiness is very real and I think they will kill off 'what's app' and SMS or they will die a slow death by being relegated to a category of "who cares" apps"
In another email from Anthony Noto to Spiegel, we see a comprehensive breakdown of Facebook's business. Noto was at Goldman Sachs at the time. Now, he's chief financial officer at Twitter. The Noto email shows that Spiegel is thinking deeply about the state of the mobile industry. He wants to understand what the biggest, most successful mobile app (Facebook) is doing. This way he can think about what Snapchat can do to build its own business.
Like we discussed last night the headline growth rate of 72% yoy with ad revenue accelerating to 82% yoy growth is remarkable at this scale and should be a real positive for the sector.
Just finished doing a deep dive on FB results
The exact opposite trend drove results than what we discussed last night. # of ad impressions actually decline by 17% year over year and was off set by revenue per impression being up 118%. FB is seeing declining ad impression due to mix shift from desk top to mobile. On mobile there are fewer ads since there is no right hand rail. But mobile monetizes better which is rare....a key question here is why does mobile monetize better? Is it due to higher prices per click or higher click through rates. If its the latter ie click through rates than its enormously positive because higher click through rates are highly correlated with better ROI which leads to ad spending. If its due to higher prices per click I would be concerned and want to understand advertiser cohort analysis ie of those that advertised last year on mobile how much did their yoy spend increase this year. If the growth in spending on a same store basis (ie holding the # of advertisers from last year constant) is single digits yoy than once everyone tries mobile ads on FB the growth rate of ad revenue yoy will plummet from triple digits to high single digits over night (aka Groupon; priceline in circa 2000).
Second key question about the decline in the number of impression due to mix is what is the change in impressions on each platform on a stand alone basis ie desktop vs mobile as opposed to overall change in ad impressions. It might be the case that desktop ad impressions are growing at a huge rate solely due to a significant increase in ads per page. If this is the case than the decline in ad impressions due to the mix shift from desktop to mobile is actually way worse than the reported 17% yoy year decline. I can explain live but in essence the yoy decline in ad impressions if the number of ads per page on desktop was held constant might be much much worse than 17% and if so once the ad load on desktop doesn't keep increasing than the real decline in total impression will come through and be worse than a 17% decline. Similar to the scenario I made earlier if the # of advertisers is held constant yoy what's the change yoy in revenue growth.
All of that said if desktop ad load is not increasing and the same store advertisers on mobile are growing their spend significantly vs being masked by spend from first time advertisers than FB is crushing it. Specifically if the growth in Ads is primarily all driven by higher click through rates due to better relevant ads on mobile than all of the private mobile companies that have a great medium from advertising will be viewed much more favorably and be more valuable (ie think u have a great medium for ads) Specifically if ads on mobile are more engaging for consumer and more relevant than desk top ads than the addressable ad market for mobile will be bigger than desktop ad market and the valuations of mobile companies will be greater than desktop all else equal on audience size etc etc. Ie this would be a very positive factor for Snapchat
If Facebook knows this to be true it would result in them being willing to pay higher valuation for mobile companies than other acquirers because google won't know nor will yahoo msft etc because none of them have scale in mobile to understand these powerful secular trends and in essence they under value mobile vs FB and thus under invest and fall farther and farther behind.
Last point on ad trends for FB...the actual revenue on FB desktop grew only 6% yoy vs last qtr that had 10% yoy growth. Once desktop FB revenue growth turns negative which is likely to happen in 2014 without any innovation (ie a successful desktop ad network or something else in the works) it will create a real drag on overall revenue growth and if any of the negative scenario trends I outlined earlier are true (significant increase in ad loads on desktop significantly offsetting the mix shift issue to mobile and price driving monetization instead of click thru rate driving monetization) vs the positive scenarios (ie click thru rate is the driver and ad loads on each platform are flat) than facebook is heading for an air pocket on growth.
Mobile Mau's grew 34% yoy to 1bn....that growth rate at such scale (in absolute terms given 1 bn is a big # and more importantly on a relative basis to its overall user base mobile is already 85% of its current WW user base) is remarkable and a clear indication that facebook is still in early days on mobile penetration and there is a lot more room for growth in mobile MAUs for everyone in mobile....this is great news for Snapchat as you are mobile first and mobile only and if the user base on mobile is bigger than desktop (which I think it is by a magnitude or more) than you will be valued more favorably than before in absolute terms and long term at scale you will be more value than desktop companies at scale. I would note the FB's mobile only MAU # reached 341m which is outstanding for Snapchat when you think about where your MAU number is vs 341mm and you have only been available for 2 years and don't have a desktop user base of 1 bn plus to target or the same geographic footprint or brand awareness!!!!
Also mobile dau to mau is higher on mobile than desktop at 60% vs 50% for FB. 60% is a good benchmark target for you to want to achieve on Snapchat.
Let me know if you have any questions
The sum of these emails shows that Spiegel is thinking carefully about his company. He is absorbing as much information as possible about the state of the mobile-technology business.
Again, this shouldn't be surprising, but it runs counter to the narrative that's been circulating until now. Spiegel is not just some frat boy who backed into a successful company. He's a smart executive.