Snap: too soon to IPO

I read the Snap S-1 IPO filing this morning and felt compelled to speak up.

Net net: If I’m reading the Snap S-1 correctly, it is too early for them to go public. They haven’t yet proven they have a great business. Going public now isn’t fair to other founders, and isn’t fair to those who would buy the stock on the IPO.

We in the tech community rant endlessly on Facebook against income disparity, and the rights of hourly workers, and the plight of the working family in America… and yet we turn around and are going to try to prematurely pull $25B out of the retirement savings of American workers in a few weeks for an IPO that isn’t ready. We want them to buy our shares now, yet the business we are asking them to buy isn’t even yet generating gross margin. It just isn’t ready.

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 and mutual funds and pension funds. They are my brothers, and my sisters, and my parents, and my friends still back in Fort Wayne, Indiana where i grew up. 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. And they will have less capacity and interest for future tech IPOs from the next deserving founder who wishes to sell shares. That hard-earned $25B could instead fund 30+ IPOs of founders who have actually proven their unit economics and scaled to $100M revenue the way Jeff Bezos did when he raised his IPO at $438M pre-money valuation. Let’s get our unit economics right, then scale to $100M, then offer our shares to the public and be proud to do so. Let’s do it at a time where those investors can still generate retirement returns by buying and holding when we are selling.

On Snap, over $2B has been invested and yet they are still working to get the unit economics to solve. Here are the rough unit economics from a quick read on the S-1:

Roughly $2.50 to acquire and monetize a new user (and getting more expensive fast with v low and slowing growth)

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 150M users)

Plus another $1+ per user a year in R&D costs

Plus another $1+ per user a year in G&A costs

Today the more users they get, the more money they lose. If they can double revenue per user, they are making profits. They need to more than quadruple the revenue per user to have the future profit stream to add up to $25B. Facebook makes $12/user/year in ad revenue and is world-class at advertising with the best technology, the most data for targeting, the best reach, and the best target demographic: Moms, who control the household budget. Snap has more tweens and teens with lower disposable incomes, so the path may be difficult to get the $3/user/year to 2x, and 3x, and 4x. They may achieve it, but they haven’t yet done it. It is too early for an IPO.

The VCs invested in this company are some of the best and brightest startup coaches around, so the founders are in very good hands. Their advice should be to keep your head down and keep plugging away. It is just too early for the VCs to declare victory and make 30% carried interest on their part of the $23B difference between the planned IPO price and their cost basis. It hasn’t yet been earned.

The founders haven’t earned it yet either. Yet they think they’ve earned the right to not only sell shares to the public at a $25B valuation for a company with negative gross margins, but also, for the first time in history in a tech IPO, to give the investors ZERO voting rights. The founder’s misogynistic emails during his formative years at Stanford might cause an investor here to want more rather than less rights as a shareholder to have definitive proof he has matured. A self-aware and matured founder who recognizes his past transgressions would eagerly give those rights. That same self-aware founder would realize he is running a company here with users who are mostly children sharing their most sensitive private communications. He would eagerly show he understands his significant societal responsibilities to the community by wanting to be held accountable to those users’ parents as his shareholders. We’ve all made big mistakes and learned from them; we show we’ve learned not by talk but our actions. If you are doing the right things when nobody is looking, and you have compelling unit economics, there is no need to artificially restrict a public investor’s rights in a startup. It is a troubling trend that is becoming all too common in tech. As mom used to say: just because you can do something, doesn’t mean you should.

Then there are the Investment Banks: Morgan Stanley and Goldman Sachs. I wish we could count on them to not sell an unproven business to the unsuspecting general public. But they will make $200M+ in fees on the $3B raised, even if Snap ends up going bankrupt in the future… and they have recognized the latter just might happen. After all, in the S-1 filing, they’ve given themselves 100% legal protection against shareholder lawsuits by warning investors in the very fine print that Snap “may never achieve or maintain profitability.” I’m not kidding; that is an exact quote in the S-1. They too know it is too early for Snap to IPO or they wouldn’t need phrases like that. Why can’t they just do the right thing and say “not yet.” Again remember mom’s advice: just because you can, doesn’t mean you should.

So maybe Snap goes public now and goes on to be a great success…or maybe they wait two years to get it right then go public and go on to be a great success…or maybe they go public now and don’t figure it out and end up burning $25B of retirement savings of hard-working Americans who can’t afford more hurt.

To the Snap founders and investors: please prove me wrong. Press pause on your IPO and keep working to earn your first $1 of gross margin and then your first $1 of net income, and only then invite the American public to buy your shares from you. If you truly have a great business under the hood here, those compelling unit economics will be clear in the updated S-1 a couple years from now and you will be wealthy soon enough.

To the tech community: we can, and should, do better. The easiest companies to get working with great unit economics are those who solve a fundamental need of the citizens in our society. And those are the ones for which you will be most proud. We need more, not less, of those in these trying times. Let’s steward the capital from our LPs as if it came straight from our parents’ retirement accounts, as for us to get liquid it ultimately will. No tech business ever needs to take $2B in venture capital before generating its first dollar of gross margin; that can often be done on the first $1M instead.

If even one of us sells an IPO to the general public that isn’t yet deserving, it hurts all of the rest of the founders who are deserving. If you have earned a position of influence with a founder, encourage them to say “not yet” when an IPO hasn’t yet been earned. If they’ve earned it with great unit economics and $100M revenue, encourage them to as soon as possible share that wonderful economic engine with those who will benefit greatly by being shareholders.

If we raise the bar a lot here as a group, then all of our facebook posts showing empathy for the vulnerable will truly help those who do most of the working and paying and living and dying in our communities.

Sorry for the rant. My two cents. Back to work.

Tim