Hype Tech: Snapchat About to Go Public Amidst Lawsuits and Criticism

Like any other social network, L.A.-based Snapchat wants you to add friends. The problem is, when it comes to them, they’re not so good at it. Is this going to be a problem to attract shareholders on the day Snap Inc. launches its IPO, probably the most anticipated and largest in years ? We’ll see in a couple of days, as the stock is expected to trade on Thursday on the New York Stock Exchange.

From the outside, everything looks bright and sunny : the self-proclaimed “camera company” is the new young generation’s hot communication tool and it managed to get a spot in the backseat of the ad-driven media industry. These past few months, it expanded across Venice Beach, from the boardwalk where employees work enjoying rooftops and incredible views of the Pacific ocean, to the cool blocks of Abbot Kinney Boulevard, which looks more and more like a hippie version of Beverly Hills’ Rodeo Drive.

But when you get closer, things look less friendly. Many people, including an ex-employee, another tech firm, Silicon Valley investors or even Snapchat’s neighbors in the Venice community, are skeptical towards the new trendy name in tech. And to be honest, I also wasn’t a fan of how a private security team of tough guys, hired by Snapchat, kicked me out of a public street just because they were afraid I might talk to employees.

But let’s start with what the business pros think. After all, they should be the most objective, and relevant when talking about IPOs. About a month ago, the Silicon Valley analyst Trip Chowdhry, from Global Equities Research, sent me a memo where he calls Snapchat “total junk” and “hyper-inflated”. The IPO, with an opening stock price between $14 and $16, could value the company between 20 to 25 billion dollars. But such a market capitalization is far from reflecting reality, according to Mr. Chowdhry.

“Durability is absent in Snapchat – it’s the next Groupon, the next Zynga, the next GoPro, the next FitBit”, he goes on. “Not to forget the most recent sensation, Pokémon Go, which only lasted for three months… When was the last time you heard of Pokémon Go?”

Mr. Chowdhry also considers the potential of advertising revenues as limited, with “more mouths to feed than before”. So how to play the game ? His advice to investors is clear : “Fundamental investors should avoid the IPO (…); however, if some speculative investors decide to play it, it will be prudent to get out of it within the first hour”.

Venice Beach Snap
Another street where Snapchat started buying real estate, by the Venice boardwalk in Los Angeles.

This opinion resonates with many others’ in the industry, such as Tim Connors, an investor who founded PivotNorth Capital.

“It is too early for them to go public. They haven’t yet proven they have a great business”, he says, pointing out the fact that they are not “generating gross margin”.

Worse, Mr. Connors thinks it “isn’t fair to those who would buy the stock on the IPO.”

“IPO buyers aren’t some anonymous one percent-er with funny money to waste. They are the working people of America, with their hard-earned 401ks (retirement) and mutual funds and pension funds”, he explains. “If we sell them a bad IPO for their retirement plans, they have less money to feed and house themselves and their families in the years ahead.”

The investor suggests that it’d be more reasonable to do a modest IPO, in the Amazon style. But that was 20 years ago. Today, young CEOs like Snapchat’s Evan Spiegel want to get rich fast. The 26 year-old entrepreneur, who was born and raised by two lawyers in a very privileged part of Los Angeles, Pacific Palisades, doesn’t want to wait. Even though “today, the more users they get, the more money they lose”, says Mr. Connors.

“If they can double revenue per user, they are making profits”, he adds. By comparison, “Facebook makes $12 per user per year in ad revenue, with the best technology, the most data for targeting, the best reach, and the best target demographic: Moms, who control the household budget”, he says. “Snap has more tweens and teens with lower disposable incomes”. Facebook held its IPO five years ago, with a share price of $38. It costs now $136.

Key figures, according to Tim Connors :

“Each user generates $3 in ad revenue per year. Each user costs them $3.25 in Google data center costs per year to store their pictures (so negative gross margin still at 150 million users). Plus another $1+ per user a year in R&D cost. Plus another $1+ per user a year in G&A costs.
Venice Snap 2
The heart of Venice Beach, where Snap Inc. is expanding. The company didn’t list a headquarters address in its IPO filing

For the blogger AJ Agrawal, on the Huffington Post, beyond Snapchat’s need to generate cash, “by far its main challenge is dealing with the constant slew of lawsuits”. And you can call it a slew, indeed.

On the tech side, Snapchat is being sued by a Canadian company, Investel, over geofilters patent infringement issues.

It has also been sued after it adopted its new name in September, Snap Inc., by a company called Snap Interactive, a social media operating dating apps based in New York.

Last month, Snapchat was targetted by a former employee who claims the company has been lying about its growth, therefore misleading investors. In the lawsuit document, Anthony Pompliano, a former US Army sergeant who also worked at Facebook, alleged that he was an “impediment to their planned IPO” for alerting his superiors about what he describes as wrong growth metrics. Snapchat parent company reported having 158 million daily active users at the end of last year.

And the list goes on. Two sisters, Sarah and Elizabeth Turner, who did promotional photos are suing CEO Evan Spiegel and CTO Bobby Murphy, asking for compensation after they became the “faces of sexting”, a practice the social network that makes pictures disappear in a few seconds has been known for. Evan Spiegel, who dates a model, has also been criticized for misogynistic comments he wrote when studying at Stanford.

But the problem isn’t only with girls. A 14-year-old boy from Los Angeles has become the face of a class action filed by celebrity attorney Mark Geragos against the Discover service of the social media app for exposing minors to “harmful, offensive, prurient, and sexually offensive” content.

There seems to be one sector where Snap Inc. isn’t being sued yet, but for how long ? Its real estate strategy in Venice draws a lot of local concern. Instead of building a new campus, like other tech firms, Snap Inc. buys out existing housing in a community where it’s limited. As a result, prices are soaring even more, in what has become the most expensive area of Los Angeles.

In the end, it makes a funky town, that hippies and skateboarders called home, rapidly turn into a more corporate and disciplined world. A private patrol ride their bikes around Market Street, where Snapchat first settled, to watch and intimidate passers-by and prevent interactions with employees (who wear badges).

But at the Poké Shack, a food spot right around the corner, I was able to chat with an employee in his 20s or 30s, who described Snapchat staff as being between “20-something to 40-something, of both gender, about half of it Asian, and more professionnal-looking than the local crowd”.

The couple who’s owned a sunglasses stand for 25 years on the other corner of the street hopes to sell its space to the wealthy newcomer. Unlike Vivianne Robinson, a local figure, who had to give up her little shop for a spot on the boardwalk concrete, because her rent went too high. “They’re taking over the place and pushing us out, it’s becoming ghost-town”, she says referring to Snap’s logo and pointing at the latest victim of the ghost’s real estate appetite, Danny’s restaurant, where she’s painted on the exterior mural.

The owners of the place, Samakow and Evan, told Yo! Venice, a local news website, with an allusion to the past presidential election : “(…) Change is the only constant and sometimes it is both unexpected and not what we’d like”. But they won’t say goodbye, they assured. “We are part of Venice. We will continue working with this community as we all move forward together”. And who knows, they might stick around longer than the ghost.

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