There’s a Lot More at Stake in this IPO than Just Toxic Financials

Silicon Valley hubris seeks third-class vote-less stockholder.  

Snap Inc., the parent company of SnapChat, filed for an IPO on Thursday. The filing revealed just how toxic this deal is going to be, not just from a financial point of view – a risk IPO investors are willing to take in order to grab the next Google or Facebook – but from a corporate governance and shareholder-rights point of view.

This has implications far beyond Snap: If Snap’s current owners can pull it off and get away with it, other companies will start doing the same thing, and it will forever change what it means to be a screwed stockholder.

Voting rights have already been diluted as our Silicon Valley heroes, such as Google and Facebook, have made a joke out of their common stockholders, but they still get to vote, even if in ludicrously diluted form.

But Snap will take it to the ultimate level: new shareholders will get no voting rights at all. Zilch. That’s a first in the history of US IPOs. These will be the three classes of Snap shares:

  • Owners of Class C common stock, which include co-founders Evan Spiegel and Robert Murphy, will get 10 votes per share.
  • Owners of Class B common stock, the existing investors, will get one vote per share.
  • Owners of Class A common stock will get no vote per share. None.

This vote-less Class A common stock is what is going to be sold to the public at the IPO. Shareholders will get little for their money – other than hope and hype and the financial toxicity of the deal that we can now see thanks to the filing.

Snap plans to extract $3 billion from the “public” by selling these new vote-less class A shares at the time of the offering in the near future, so initially to Wall Street firms at the IPO price before trading starts. These firms then sell their shares to the public when trading starts, hopefully at a higher price. If Snap can pull it off, it will be the largest “tech” IPO since Facebook.

The company currently has a “valuation” of $17.8 billion, established behind closed doors at its last round of funding. The hope is that the IPO price will value the company at $20 billion to $25 billion. That’s some serious moolah.

Now that we have its S-1 filing with the SEC, we can get a feel for the risks. Snap was founded in 2011. For years, it had no revenue model. In 2015, it started putting ads on its service and booked $58.7 million in advertising revenues, most of it in the second half. And it had a loss of $381.7 million. OK, it’s a startup. Fine.

In 2016, with its ad platform fully operational, revenues rose to $404.5 million, of which 98% was from advertising. And its net loss exploded to $514.6 million.

This is the same program Twitter is on. Twitter is still losing a ton of money every year: $521 million in 2015; $577 million in 2014; $645 million in 2013. It has not yet reported results for Q4 2016, but the net loss for the year will likely be between $300 million and $400 million. The company has announced rounds of layoffs and is subleasing a considerable part of its office space. Its shares have plunged 74% from its post-IPO peak.

Like Twitter, Snap has come up with its own metrics. Its key metric is “daily active users” of which it had 158 million “on average” in Q4, 2016. But growth has been slowing over the last few quarters.

The growth rate from Q3 to Q4 2016 was only 3.3%, down from a growth rate of 13.8% a year earlier, and down from 14.5% two years earlier.

The filing explains some of the reasons for this slowing growth in users, including “significant competition in almost every aspect of our business both domestically and internationally”:

This includes larger, more established companies such as Apple, Facebook (including Instagram and WhatsApp), Google (including YouTube), Twitter, Kakao, LINE, Naver (including Snow), and Tencent, … that offer products and services that may compete with specific Snapchat features.

For example, Instagram, a subsidiary of Facebook, recently introduced a “stories” feature that largely mimics our Stories feature and may be directly competitive.

Many of our current and potential competitors have significantly greater resources and broader global recognition and occupy better competitive positions in certain markets than we do.

The filing explains that it’s easy for users to switch to the competition. And turns out, its users, who are primarily between 18 and 34, are not “brand loyal.”

And then there’s somewhat of a cost situation. Snap uses “a capital-light business model,” which means third parties provide the massive infrastructure needed to run the service that is heavy on videos and images. This third party is “primarily” Google Cloud. Snap just “committed to spend $2 billion” with them over the next five years.

So that would be $400 million a year on average, just for having the site hosted in the cloud. Alas, total revenues in 2016 were only $404 million. So that doesn’t leave a lot of room for anything else – much less profits.

OK, it’s going to be tough out there. We get that. The cloud is expensive. Every business should face stiff competition sooner or later to bring out its best. It’s just a question of whether or not the business can make it – and at what valuation investors want to own part of it, and if they want to own it as screwed third-class stockholders with absolutely no voting rights.

This non-voting share scheme is designed to protect top management from the wrath of stiffed stockholders.

Financial risks – a company bleeding red ink for years to come and needing the IPO money to be able to continue to bleed – are why IPOs are so much fun and such a gamble. Some work out. Many take your money down with them.

But there is something much more important at stake: surrendering your voting rights. And if equity investors – this includes institutional investors that will back the IPO – don’t revolt now, it’s going to become pandemic. If Snap gets away with it without a severe drubbing in the share price and ultimate abandonment by investors, they’ll all do it. And third-class vote-less shareholders will become the norm.

Despite what you might think, automakers did not “cut back” on fleet sales. But keep an eye on rideshare companies. Read… Car Sales Crash, But It’s Complicated

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  63 comments for “There’s a Lot More at Stake in this IPO than Just Toxic Financials

  1. Smingles says:

    Directly from their S-1 filing:

    “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

    Full disclosure though, this seems to be relatively common IPO language for some of these social media driven companies, e.g. Facebook.

    I don’t see this company succeeding in the long run.

    • chris Hauser says:

      i’m going to step in and say:

      don’t buy it, because it’s too risky, but if you want risk anyway, you can loan to me, and i guarantee you a better return over 10 years.

      any takers?

    • Marco says:

      I’m going to venture out on a limb here to say this won’t be bid up by the buy side, and especially retail. The dumb money ain’t so dumb anymore …. or are they?

  2. When the coming recession starts ( depression ? )

    Ad revenue will collapse, as no-one will be spending much.

    Gotta love it ! Damn fools . See where they go when the foolish consumer ( excessive, and debt-powered ) spending upends.

    ( . . . . .and FakeBook, Twittser, and all the other ad-based things that I never use. Maybe even G00Gle too ! )


    • Frederick says:

      And then Mr Zuckerhead will fly his private plane to his walled in 700 acre redoubt in Kauai and everything will be good Right? That’s the plan anyway Wonder if the natives will have different plans for him?

      • The Jackal says:

        Does Zuckerhead have a big roof over his private walled-in 700 acres in Kauai ?

  3. Taco says:

    Also, just read how the founder spent 900k on personal security…this a major red flag on the corporate culture of spending investor money frivolously…how paranoid do u have to be spend 900k in 1 year on personal security? His ego must be massive, the old Los Angeles joke ‘don’t you know who I am’…as I don’t think 99.9% of folks won’t even know or care who this dude is.

    • Frederick says:

      Don’t worry the local thugs in NZ will know who he is before his plane touches down Count on it

  4. George McDuffee says:

    “If god didn’t want them sheared, he wouldn’t have made them sheep” – variously attributed.
    Simple, albeit difficult solution: Return to the exchange rules (or implement SEC regulations) that only one class of common stock can be traded, and that class must be voting.

    Trading of multiple classes of stock on the NYSE was prohibited in 1926 [ ], and was again allowed only in 1986 [ ]

    We are allowing an increasing adulteration of traditional financial products, which is sure to end in disaster.

    If I think “Beanie Babies” or base-ball trading cards are a good investment, then multiple common stock classes may make some sense, but if I want to invest in a going business, with some input as to its operation, it does not.

    “Trust me – Trust me” died in 2008…

  5. OutLookingIn says:

    To produce. To be a producer. To make available to the public to consume.
    The public must perceive to receive fair value in return.
    What does SNAP produce? An information technology platform.
    Just like in a previous era – newspapers.
    Prior to 1929 each small community, village, town, etc. had many newspapers, hand bills, periodicals, etc.
    At the moment we have you tube, face book, twitter, snap chat, etc.
    After the crash of 1929, over 90% of print information platforms just disappeared. This same situation has now arisen anew, in this most recent tech boom, with a proliferation of information platforms.
    Most of these tech-info-platforms will fade away, considering the median price/revenue ratio of the S&P 500 index.

    • Ethan in Northern VA says:

      Uh, snap chat lets you send pictures, and set those pictures to delete in X number of seconds or something. It has protections against capturing them (I’ve heard, I’ve never used it.)

      It’s how the kids send naked pictures of themselves to each other, and the images self destruct so there is no evidence.

      • Frederick says:

        Is there any guarantee that there is no evidence There’s a fool born every minute evidently

        • TheDona says:

          There are apps available to save those naked pictures and a way to do it on iPhone without an app. So no. they do not disappear.

      • nhz says:

        OK, so if I understand correctly the USP of the site is – just like with platforms like Fakebook – that it can be used by well connected parties like NSA/CIA to track and blackmail citizens ;-)

        funny how people believe that self-destruct works on the internet …

      • Thunderstruck says:

        “the images self destruct so there is no evidence”

        If you believe that, then there is a very special bridge I’d like to sell you.

        Anything that can be viewed can be saved by punching Alt+PrtScrn, starting MS Paint and then pasting it in. Save as , enjoy.

        • Paul Morphy says:

          “the images self destruct so there is no evidence”

          Your investment capital in Snapchat equity, not any photos or images, is the only thing you should expect to self destruct without any evidence.

  6. Petunia says:

    The tech values are all ridiculous because most of the technologies and platforms are easy to replicate.

    • MC says:

      It’s what I call “non-unique technology”.
      A typical example is Tesla. If you listen to the fanboys it seems the electric car is some highly exotic technology only Tesla has access to. But the technology is hardly revolutionary or unique: at the moment Chinese customers can choose from 42 different models of passenger cars (there are light truck and vans available as well), ranging from two seater city cars to SUV’s. Yes, some models are pretty unsophisticated by any standards, but those sold by the likes of Daimler, Nissan, Toyota and Volkswagen are as highly advanced as you’d expect them to be.
      Hell, I recently went to see a fully electric van for my firm, a Nissan eNV200. Very nice, perhaps too nice for a van, but the unrefueled range still doesn’t cut it for us: it would need at least an extra 80km, but hopefully the next version will get there.
      The only unique thing Tesla has is the ability to convince investors they are selling something so unique even a delivery van comes equipped with it. But never underestimate the power of aging hipsters with good credit…

  7. akiddy111 says:

    Thanks Wolf. Very informative.

    As long as they do not take away our shorting rights, I’ll still have a wee bit of optimism left.

    • Cyrus says:

      Not to worry; SEC and companies are working on that too, wink, wink.

    • Wolf Richter says:

      Hang on tight to those shorting rights during the next crisis. That’s when they normally take them away, just when you want them the most :-)

      But also be aware that with enough hype, anything can be made to jump, especially when the valuation is already far beyond the logical. Then by definition, logic no longer applies, and there is no longer any logical limit to how far it can jump.

      • Petunia says:

        I agree that the market valuations exist in their own alternate reality and can rise to exponential levels having nothing to do with real fundamentals. We have watched the disconnect for decades now. But I think that those valuations undermine the credibility of the market as a whole. Sure you can ride the wave, but can you be sure it’s not a tidal wave, ready to slam you onto the shore or suck you back out with it. Most people should know it can be.

        We are now living in interesting times where the credibility of the media and govt are continually under question. I hope people are wary of the “irrational exuberance”.

        • nhz says:

          who cares about voting rights, profits or dividends when central banks keep juicing the markets and the only way is up?

          It’s all one big casino, fundamentals went out of the window long ago. Of course most players think they can ride the wave and get out in time, just like in the casino ;-)

  8. Tom kauser says:

    Japanese pension funds?

    • MC says:

      Too late: GPIF, the largest pension fund in the world, has announced it will invest “up to 6.5 trillion yen” in US infrastructure projects.
      The lion’s share would be invested in Governor Jerry Brown’s lunatic proposal for a high speed railway in California.
      Now: even France, which has been running high speed trains longer than anybody else, has admitted they are a financial black hole. The concept may look cool but they aren’t the kind of project you invest into if you want a steady yearly return to pay off your obligations.

      As costs for the new Chuo Shinkansen (Maglex high speed train) in Japan are spiraling out of control even more than usual, it’s possible this hare-brained scheme is nothing more than an attempt to dragoon unwilling Japanese retirees to finance a California make-work project for JR Tokai, Mitsubishi and their galaxy of contractors.

      • nhz says:

        before you know it the big pension funds are investing trillions in internet infrastructure, i.e. in platforms like Fakebook, Snapchat etc. :-(
        I bet that’s an even bigger black hole than high speed trains over the next 25 years, those trains at least have some use in the real world. What’s the use of Fakebook and Snapchat, keeping people from doing their job? Tracking down every human and pet on the planet?

        • MC says:

          The difference is the value of companies like FB can be goosed by several artificial means, while revenues from infrastructures cannot: a typical example are Italy’s and Spain’s “ghost highways”. Turns out increasing tolls 20% overnight on “underutilized” highways is the best way to lose what little traffic existed…

  9. PanamaBob says:

    The Floating Casino is now elevated with the addition of hydrogen, remember it’s a very explosive gas. The outcome may not be a crash but a blast.

    • Frederick says:

      Gold and Silver are looking more and more attractive lately Physical ONLY of course in your possesion Barbaric I know

  10. Siborg says:

    Imagination land is volatile and fickle.

  11. Anon says:

    So don’t buy the stock.

    • NotSoSure says:

      Have you heard this disease called FOMO? It stands for Fear Of Missing Out. Combined with OPM = Other People’s Money, this one looks like a winner.

      • nhz says:


        About ten years ago the Dutch banks did an interesting study into why people were buying new homes. They could chose from a dozen different reasons for buying now, or buying that specific home e.g. job/income change, family change, investment etc. Turned out the big majority decided to pull the trigger because of FOMO, often in the form of ‘buy now or be priced out forever’. And with no downpayment needed for a mortgage, the OPM part was alive and kicking as well. Sure way to create an epic bubble …

        I’m hearing the FOMO argument mentioned frequently again these days …

  12. unit472 says:

    The ‘cloud’ seems an apt description of where these ‘businesses’ are located. Their major advantage over conventional media companies seems to be they do not have to pay for content but trying to monetize eyeballs in a world of static ad revenue, proliferating platforms and a fickle public may not work. The ‘cloud’ may not keep a crowd.

    • JB says:

      data storage goes through cycles of centralization and decentralization. One virus can wipe out the accounts of many in a cloud based system and possibly you can forfeit your privacy rights to your data. Interesting that SNAP outsourced cloud services to google. Google is a data capture repository of gigantic proportions by design. Information is a marketable commodity. Fill in the blanks my friends . as far as snap chat selling non voting stock , let it be, caveat emptor ! it may be a way to prevent hostile takeovers/activism/Icahns .

      • Petunia says:

        When I read they delete all images, the cynical me thought, I bet they sell them first.

        • Kent says:

          The cynic in me says Google is going to want to let you know they have all those photos when you decide to run for office. And they’ll let you know where you stand on certain issues.

  13. MC says:

    I hope this is not out of place, but Snap, very much like many other firms in similar fields, seems overreliant on ad revenues as a source of cash: as the article says their 2016 revenues stood at US $404 million, of which $396 came from advertisements.

    Over the last couple of years even publications such as Forbes have grown aware of what may be the bull elephant in the crystal shop of ad-based revenue streams: Millenials, the largest age group in the US and one the largest worldwide, really really hate advertisements.
    Leaving aside everything else, a study found Millenials constitute a massive full 40% users of ad blocks.
    Sure, you can try cramming advertisements down their throats by shutting off those using ad-blocking softwares and/or forcing people to watch promotional videos, but don’t expect them to rush to the shops (or to Amazon) to buy the products you just tried pitching them. In fact expect even more sophisticated ad-blocking software to appear: honestly I am genuinely surprised lobbysts in Washington and Brussels haven’t already started pushing towards an ad-block ban.

    Regardless, it will be quite hard for Snap or anybody else to continue justifying growing ad revenues in face of a public that doesn’t “consume” advertisements and a growing part of which seems to be genetically programmed against it. More traffic doesn’t automatically means more people flocking to your advertisers’ websites: soon those advertisers will get it and start demanding either lower prices or aimed ads that truly work, not Google’s “targeted mis-advertisement” (Google seems fairly and firmly convinced I am interested in women’s shoes and handbags).

    • Petunia says:

      Millennials don’t watch tv and they generally don’t have much money. Their spending is geared to “experiences” and tech. My millennial is tolerant of the ads because to him they translate to free services.

    • nhz says:

      fortunately for all those big web platforms, webbots and clickfarms don’t care about ads or adblockers ;-)

      I’m anxiously awaiting the day that Fakebook announces they now have over 10 billion users; any day now ;-)

    • Kam says:

      Google is founded on linear thinking. Throw out a few stray keywords and they really think they know you. They are not the only ones that can practice deceit.

      My observation is most advertisers are throwing their money away on the internet.

    • harvey says:

      Oh yeah I can confirm, I belong to that age group, and I have made a firm conviction that if you try to target and stuff ads into my throat like what you said, I will publicly shame the website and the company whose ads that I saw on my facebook wall, and devote not to buy that product for a long time, matter of fact, I will choose to buy their competitor’s product and post about it as well. They will soon find out how much of a bubble this whole thing called “ad revenue” is.

  14. TheDona says:

    Snap’s Discover platform is supposed to deliver ads but check out how they intend to do it: https: //

    If you play an interactive Gatorade game for 3 minutes….does this translate to more sales?

    P&G’s (largest ad buyer in the world at 8B) Marc Prichard just gave a call to arms regarding the fraud of digital media :

    Prichard: “We’ve been giving a pass to the new media in the spirit of learning,” he explained. “We’ve come to our senses. We realize there is no sustainable advantage in a complicated, non-transparent, inefficient and fraudulent media supply chain.”

    His speech has rocked the Ad and Marketing world. Could be a reality check for Snap since it is not profitable and does not already have ad analytics in place.

  15. william says:

    25, maybe 30, years the business press told people not to invest in newly public companies for their first 3 years on the market. It was ‘common sense’ back then.

  16. Humpty Dumpty says:

    The number of numbskulls in the Bay area masquerading as tech and business savvy wunderkinds simply astonishes and worst of all they believe their own bull. Dealing with them is a trip to Idiocracy. The entire construct of these media and many tech companies now sways miles in the air on a tether held by morons. That anyone would put real money to this degree into such obvious madness means quite simply there is an ongoing economic calamity underway shot through with fraud, duplicity and delusion to which all agree and do not want to be left out. Hilariously, their final question will be, as always: WTF is going on?

    • nhz says:

      the calamity could have a silver lining if all these silicone geniuses put their money where their mouth is and spend it all on ‘tech’ nonsense stocks just before central banks pull the plug on the markets. Problem is, there are many vested interests (like MIC/NSA) that want to keep unlimited money flowing to these companies, so not sure if evolution will be allowed to run its course :-(

  17. Ed says:

    More evidence that the end is near.

  18. Karl says:

    This stock offering seems similar to tracking stocks issued during the Dot Com era. It is like an ETN but, based on a single company rather than an index. Good for financial engineering to separate fools from their money.

  19. MC says:

    To be fair; Snap is based in LA, not a valley company, enough bad press here without having the guys in LA confusing the issue.

    Nice points about how these companies make money, and they know their vulnerability too, how else do you explain all those moo shots.

    • Wolf Richter says:

      I used “Silicon Valley” in the broader sense of VCs and startups, rather than just a geographic area. Just like “Wall Street” means finance in the broader sense, not just firms with an address on Wall Street.

  20. BaritoneWoman says:

    If one is going to get involved in IPOs, they may be better off investing in an index ETF such as provided by Renaissance Capital

  21. Kevin Beck says:

    I think a reverse would be a great idea here: Those that paid the highest entry price (to the company, via the IPO) should have the superior voting rights.

    This is a low-moat business that almost anyone can run. But I guess they don’t want just anyone running the company; thus the extreme voting disparity among classes of share-owners (I mean, shafted contributors).

    They are on track for maybe $750 million in advertising sales this year, barring explosive growth. With 158 million users (keeping it static, since no user growth rates are known), that’s almost $5 per pair of eyeballs. Every year. I don’t know if I’m looking at the best metric, but the other numbers look worse. And they have multiple well-financed competitors, including Google, who is a supplier to them!

    Another thing: Their SEC documents relating to the IPO describe them as a “camera company.” They are no more a camera company than Home Depot is a lumber manufacturer. They sell something that requires a camera in the production process, just like Home Depot sells things that have lumber in the manufacturing process.

  22. DV says:

    Do not worry. Once they have spend what they get from IPO on Google Cloud, Google will buy them out. That is how it works. Twitter will bought sooner or later too.

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