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:

  • Despite growing DAUs (Daily Active Users) just 3.27% last quarter and spending almost $1 billion to gross only $404.5 million for a big net loss of $514.64 million last year, Snap is offering investors one of the most pro-founder, anti-investor terms of any IPO in recent history. If that's not a sign of a bubble, I don't know what is.
    • Post-IPO, Evan Spiegel will have sole control of Snap. Snap's Spiegel Poised to Gain Sole Control After IPO
    • Evan Spiegel will get 3% in additional RSU's that vest immediately on IPO.
    • For the first time ever, IPO investors get zero voting rights.
    • Evan and his CTO can quit and still control Snap because their founder shares have super voting rights. (Hat tip: Paul Cohn)
    • Oh, and Snap is a camera company. Surprise!
  • The Information You Missed This Week
    • Investors will value Snap as a social media company, not a "camera company". Why? Because Snap sells ads to show their users -- just like social media companies Facebook and Twitter. Pitching Snap as a camera company is an attempt to portray Snap as a unique, highly differentiated company when it may just be another badly-run social media startup that peaked and can't grow or be highly profitable.
    • How come Twitter is only worth $12.98 billion when Snap is seeking a valuation of $20 to $25 billion?
  • Higher Revenues, Higher Losses. While increasing revenues by $346 million in a year, Snap also increased its losses by $140 million. Can Snap grow to break even?
  • Snap is blowing $2 billion over 5 years on Google Cloud while only bringing in $404.5 million in revenues last year. Facebook built their own cloud infrastructure -- maybe Snap should too.
    • Snap Signed Five-Year, $2 Billion Deal to Use Google's Cloud
    • Could Snap's high Google Cloud bill be related to its inability to recruit and retain great cloud experts? Peter Magnusson left Snap after a very brief stint as VP of engineering to be head of cloud computing at Oracle.
    • Facebook's recent infrastructure costs are "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." See What Matters and What Doesn't in Snap's S-1
  • Snapchat depends on live video, which requires expensive bandwidth many users can't afford or get access to, especially in emerging countries. This puts a natural cap on growth and frequency.
  • 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. However, the real risk is Snapchat's bro culture.
    • 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.
    • Snap now has a San Francisco office where it hired excellent former Google Search engineers to build out Snapchat's search functionality.
    • Like Uber, Snapchat has a small army of great engineers from China who work all the time.
    • Snapchat has been more successful recruiting great software engineers from Seattle, etc.
    • To recruit those from outside greater L.A., I'm told Snap sometimes resorts to pitching the "hotter women" in Venice, CA compared to other places. While far from a majority, this kind of tactic is not uncommon among successful L.A. startup founders, accelerator partners and investors. Whenever it used to happen, a voice inside my Harvard Law/former SEC-regulated brain would think - "Are you a walking lawsuit waiting to happen?"
    • Snap's DNA has a strong bro culture strain.
      • "Fuck Bitches Get Leid," the Sleazy Frat Emails of Snapchat's CEO
      • Snap perpetuated this culture in their recruiting -- at least as of 2015. Unless that changed, I don't see how Snap recruits the best female, LGBTQ or even male employees 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's user growth plunged to just 3.27% for the quarter. That is a disaster for a young, highly unprofitable "growth" company when Facebook is spending massively and having Instagram copy every single successful feature or product (besides Spectacles) Snap rolls out.
  • Snap's 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 Digg, Google+, Del.icio.us, 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 may be 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. As an early tech company, you need to grow. Period. Snap grew 3.27% from Q3 to Q4 in 2016. That is atrocious.

Disclosures: I own stock in Snap's competitors, including Facebook, which owns Instagram. I also own stock in Morgan Stanley, Snap's co-lead underwriter with Goldman Sachs.

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Published on: Feb 7, 2017