Snapchat owner Snap Inc is the latest Californian tech company to issue an IPO, but John Colley, Professor of Practice in the Strategy & International Business Group, believes there are signs of a growing wariness among investors.
Snapchat-owner Snap Inc has embarked on its investor roadshow as it looks to float at an enormous valuation of around $18 billion, but is investor appetite beginning to cool for technology start-ups?
Declining fortunes at LinkedIn, Yahoo and Twitter may be affecting appetite for the float of Snap Inc, owner of the messaging service Snapchat and Spectacles - its answer to Google Glass that records 10 seconds of video. Ultimately these businesses have been unable to effectively monetise their armies of users.
The sheer power of network effects has meant that Google and Facebook are rapidly cornering the market for digital advertising and the smaller players are continuing to struggle to attract advertising.
Indeed LinkedIn, Yahoo and Twitter have declined to such a degree that all three have put themselves up for sale. Respectively Microsoft and Verizon have found $26 billion and $4.8 billion to acquire LinkedIn and Yahoo in the belief they can succeed where others have failed.
Investors are not convinced in either case. Twitter failed to find a buyer despite President Trump’s attempts to revitalise the business with his fascinating comments. The consequence of a failed sale is cost-cutting and a collapsing share price.
Why is Snapchat owner Snap Inc issuing an IPO now?
Against this background Snap's CEO Evan Spiegel and Chief Technical Officer Bobby Murphy have chosen to float the business and create personal fortunes. Timing is everything with market floats, and growth at Snapchat is slowing.
While markets are high the timing seems curious as Snap has costs of $900 million and sales revenue from advertising of $500 million.
Investors would wish to see more progress on user growth and advertising revenue before buying the shares at a staggering valuation of around $18 billion - 46 times revenue!
Perhaps Spiegel and Murphy know it is now or never. If user growth slows further, or digital advertising revenue fails to expand rapidly, then investors will begin to wonder if Snap will be another Twitter, Yahoo or LinkedIn.
To make matters worse the new shares on offer will have no voting rights. The founders want almost complete freedom to spend investors’ money as they see fit and without consequences. In such circumstances investors do not know what they are investing in.
Charismatic tech founders such as Travis Kalanick at Uber did not worry too much about investors. They thought they were investing in a ride-hailing app but ended up funding the development of driverless vehicles, which means competing against every other automobile manufacturer. This, despite losing an expensive price war in China and having to sell out. India does not look much better for Uber either.
At Tesla investors thought they were investing in an electric car but ended up paying for a large struggling solar panel business which was in desperate need of cash. Both interests of Elon Musk.
In view of tech leader behaviour investors will be very wary of investing without voting rights on acquisitions and board constitution. In effect , investors will have no voice and in the tech sector are unlikely to ever see dividends.
Spiegel and Murphy are about to undertake a number of roadshows to sell the benefits of the business. Questioning is likely to be demanding, which might be a novel experience for them. Will they decide to either ditch the float and avoid aggressive investors or grant investor voting rights before time runs out? We will soon know.
John Colley teaches Strategic Advantage and Strategy and Practice on the Executive MBA and Executive MBA (London). He also teaches Managing in a New World and Strategic Thinking: Strategic Evaluation and Analysis on the Full-time MBA.