An Open Letter To Snap Ahead Of Its IPO

An Open Letter To Snap Ahead Of Its IPO

Dear Snap, Inc.,
Congratulations on your S-1 filing this past week.  It’s a great accomplishment as a company and great for the tech industry.  During our 35+ collective years as stock analysts, we’ve helped a lot of companies go public.  We know you have great banks working on your deal that will give you good advice, but we thought we’d share our most important learnings about how the best companies handle IPO’ing and being a public company.

  1. Manage Expectations.  Set an achievable bar for revenue and earnings and stick to it.  Obvious, but easier said than done.  You want to be Bill Belichick (go Pats), not Rex Ryan here.  We’ve seen too many companies agree that this is the right approach, only to miss a quarter out of the gate or within the first year.  The easiest quarter to get right should be the first one out of the gate, your first quarter as a public company.  If you miss your first quarter out, you’re in for a year of buy side investors disbelieving everything you say and you’ll have to slowly rebuild your credibility.  We believe it’s better to take a slight hit on your valuation at the IPO with conservative numbers you have a very good chance to beat than more aggressive numbers you think you might hit, but aren’t 100% certain.  The slight hit to IPO valuation may not even happen because smart investors will work through your conservative numbers and recognize that you understand the game.
  2. Guidance.  Give some level of guidance because it will make your life easier.  Every great tech company takes a different approach to guidance.  Neither Google nor Facebook offer formal quarterly or annual guidance, but both occasionally give directional color.  Facebook more than Google.  An example is Facebook’s policy of offering verbal expense growth guidance quarter-to-quarter.  Both Apple and Amazon offer one quarter out guidance for total revenue and the ability to work toward an operating number.  Microsoft offers one quarter out guidance with segment level detail as well as high-level thoughts for the full year.  Tesla also offers one quarter out color on units shipped with a full-year expectation.  The bottom line is this: guidance gives you the ability to influence the conversation around your numbers, particularly as a new company, so we think it makes sense to offer it.  When we were analysts, we always had a lot of positive feedback on how Microsoft handled guidance and we didn’t even cover that stock, so a quarter out with a little color on the full year will make investors happiest.  We’d recommend the full-year color be high level and about things you directly control (expenses, CAPEX, product launches, etc.) without commenting on revenue.  One additional thing we’d suggest around guidance, while not formal, is to directionally explain the long-term model (5+ years out).  The company is investing heavily in product and talent, thus operating at a loss today.  What do operating margins look like in 5 years?  Should we expect Facebook margins?  This leads in to the next suggestion…
  3. Paint The Long-Term Picture.  While every great tech company treats guidance differently, they treat talking about the long-term the same.  Explaining the long-term strategy brings in long-term investors, not all that dissimilar to pitching venture investors.  Hedge funds and traders might move your stock day-to-day, but long-term investors will shape your stock chart over years.  Facebook and Google are among the best at painting the long-term picture of their businesses.  Facebook explicitly updates its 3, 5, and 10 year plan every earnings call, which tends not to change much, as it shouldn’t.  Google tends to speak more thematically and has been emphasizing AI and machine learning as the future of their business over the past several quarters.  Use your time with investors on the roadshow to explain what it means to be a camera company and why that’s important for the future because text is dead.  Explain how this is good for advertisers.  Incorporate AR into the discussion.  The camera is the basis for computer vision.  Lenses is emerging as a product to do interesting things with AR in the near term and Spectacles are the most usable AR product on the market today.  Tell investors how those products evolve over the next few years.  Facebook’s 3/5/10 window presentation is the cleanest and would suggest something similar.  It’s not like they haven’t borrowed from you before.
  4. Optionality.  All great tech companies have optionality to their stories.  We define optionality as key products or services that have little to no direct revenue contribution today, but do have the potential to be significant in the future.  Usually stocks with optionality are rewarded with higher multiples.  Some examples: Amazon with Alexa and original content, Facebook with VR and Messenger/WhatsApp, Google with Waymo and Cloud, Tesla with Powerwall/Powerpack and Solar City, Apple with the car and AR.  Snap’s optionality story is probably in AR wearables.  As noted above, Spectacles are the most usable AR product on the market today.  They focus on one simple feature: the camera.  Give investors enough of your vision here so they can dream about the future.

Our final piece of advice may contradict everything we wrote above, but don’t worry too much about the stock.  The best companies we’ve covered rarely talk about the stock price.  It’s always about the business, the near-term milestones, and the future.  When you get those right, the stock takes care of itself.

We’re excited to see a new public tech company and wish you a road more similar to FB than TWTR.

Good luck,

Loup Ventures

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.  

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