Update: Snap Inc. is currently facing a lawsuit that could affect their IPO. See the update at the end of the article for more information.
If you haven’t heard about Snapchat by now, where have you been?
Snapchat is one of the most popular mobile apps in existence. It lets users record videos, put those videos through interactive filters, and send them to friends or fans in a time-release manner. Videos disappear after a single viewing if you send them to a friend or 24 hours if you share them with all your friends.
Trying to explain Snapchat makes anyone sound positively ancient. That’s because it is mostly popular with a young demographic, who spend hours watching hundreds of small videos on it. According to Bloomberg, 70% of all 18- to 24-year-olds walking around with a smartphone actually use Snapchat, following friends, celebrities, and popular brands as they make incremental updates throughout the day.
Snapchat was smart to quickly capitalize on their 235 million+ users for the sake of making money. The app’s super-popular video and photo filters lets users transform their faces or places them in a background, and they can be sponsored by pretty much anyone. When a user watches several videos, the app casually adds a small video advertisement in between two videos. Snapchat also lets brands pay to display content on a dedicated Discover tab, which features everything from the NFL to video game publications. No matter how little a user plays with the app, they’re guaranteed to see at least one ad.
That is why Snap Inc. (owners of Snapchat) wants to go from a private company to a public one. The company, at a valuation of $25 billion, projects that they can make a billion dollars in ad revenue next year, and would like to sell shares of company stock to raise money for future projects and expansion. To do this, they’re filing an IPO (initial public offering), a complicated but lucrative process that could change the company as we know it.
Snapchat is the most popular video-based social app (that isn’t YouTube, of course).
They have over 235 million users, and a large percentage of their users are in a young demographic.
The company makes millions on branded filters and ads.
The company also makes money from a dedicated brand page where publishers show off their content.
Snap Inc. is rapidly expanding, which is why they want to become a public company.
Instead of borrowing money and taking on more debt, Snapchat can sell shares of their company to the public to raise money, increase in value, and invest in their future. This means that you and I could potentially be future owners of Snapchat.
To accomplish this, Snap will file for an initial public offering.
Snap Inc. will to work with an investment bank (or banks) to see what the whole company is worth in dollars. The bank(s) will then split the company’s ownership into shares, or incredibly small percentages that signify ownership in Snap. The company will keep the majority of the shares to retain majority ownership, but the other remaining shares will go on sale to the public (hence initial public offering).
Simply put, when investors buy shares in the company during an initial public offering, the company gets money for those shares.
When Snap files for an IPO and becomes listed on the stock market (which they can do as early as March), they won’t have to take on any more debt after raising billions, letting them grow as a company. Their valuation, however, can now increase or decrease depending on how well they perform as both a company and on the stock market.
Fewer tech companies are filing for IPOs these days for numerous factors, one being that their revenue streams and sources of income aren’t clearly figured out. In the case of Snapchat, they get money from ads and millions of users watching ads, which could mean a tremendous profit in the future. This could potentially woo investors to put money into the company, which could see the company grow far beyond a single, widely used app and into an essential way of digital life.
Update (1/6/17): As Snap gets ready to go public, the company is facing a possibly damning lawsuit that could hurt their value. Anthony Pompliano, a former employee of the company, claims that Snap Inc. doctored their user stats to mislead investors and artificially inflate their company’s value. Pompliano claims he was enticed by Snap Inc. to leave Facebook, his former employer, using said fake user stats. Pompliano also claims he was hired to share confidential Facebook secrets.
While the claims and supposedly “real stats” are unavailable, this lawsuit could put a damper on the company’s initial public offering. After all, if Snap is showing investors stats that are lower than they really are, then the company could face serious financial and legal repercussions. Pompliano claims he is trying to keep the company from “mak[ing] false representations concerning his termination,” as stated in the complaint. Snap, however, says Pompliano is just a disgruntled former employee. Time will tell who’s actually telling the truth, but Snap needs to prove their stats are, in fact, true…or risk missing out on billions.