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The Snap Inc. IPO

Season 1, Episode 32

ACQ2 Episode

March 4, 2017
January 6, 2019

SNAP! Acquired is live on the scene reporting from the "Super Bowl" of 2017 tech events: Snap Inc's hugely anticipated (and just plain huge) IPO. What does the future hold for this plucky "camera company"? Will Snap's IPO endure as tech's most important picture-frame since the 2012 debut of Facebook, or is it destined to fade as just another snapshot? We debate!

Topics covered include:

The Carve Out:



We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
March 4, 2017

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
March 4, 2017


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
March 4, 2017

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
March 4, 2017

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
March 4, 2017

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
March 4, 2017

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
March 4, 2017

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
March 4, 2017

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
March 4, 2017

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben:                 People misuse the crap out of literally and they’re like, “Oh, he literally had him eating out of his hand.” It’s like, “No, he didn’t. He figuratively had him eating out of his hand.” But last year, whatever Merriam-Webster added an additional definition to literally to mean figuratively. So literally means the sum total of everything that it means and everything that it doesn’t mean.

Welcome to Episode 32 of Acquired, the podcast where we talk technology acquisitions and IPOs. I’m Ben Gilbert.

David:              I’m David Rosenthal.

Ben:                 And we are your hosts. Today’s episode is the “Super Bowl” for our world, the Snapchat IPO. It’s been long awaited, highly speculated and everybody’s got an opinion. And they’re not all the same. So we’re recording right now on Friday, March 3, exactly 21 hours after trading originally started. Trading is underway for day 2 and hopefully we should be able to get this out to you guys by probably tomorrow over the weekend and get some pseudo real-time discussion going here on Snapchat.

So, as you know, from our last episode, we’ve started taking sponsors for the show and there is no more appropriate sponsor for show about a landmark IPO than Silicon Valley Bank. So here’s a brief 30-second Q&A with Silicon Valley Bank’s Washington and Western Canada market manager, Minh Le:

Silicon Valley Bank works with a lot of startups. What’s something that’s different in the funding or exits of startups today than, say, a year or two ago?

“Minh Le: Yeah I would say the biggest thing that’s changed within the last couple of years has been valuations and you saw that really at the beginning of 2016 where there was kind of a public market shock and VC investors started really pulling back on valuations. And the reality is, you know, in 2014 and 2015 there’s been a lot of call it ‘valuation bloat’ in terms of when you look at multiples of metrics on SaaS companies as an example, it’s been a very high multiple back then and today it's a little more what I call ‘normalized.’”

Great. Thanks, man.

All right, listeners. So as you know, we also like to try new things on this show and we have a little bit of a format switch today which will tell you about one thing that I wanted to try is reading some of our iTunes review here on Acquired. So when you guys leave one that we think is particularly worth reading on the air or funny or, I don’t know, extra complimentary or something, we’re going to read them. Kind of like the Bill Simmons Mailbag but for iTunes reviews. So, here’s one: “They aren’t scalpers that want to create fake problems or to short a stock.” Well, thanks Spencer Camp. We appreciate it.

Here’s another. “It's as if you are reliving the story with them as an insider” – from Peach1987. Thank you. We appreciate that.

“Ben has been a real trooper here. He was post-surgery and now he’s back. Great show” – MGMGMG3141. Well, to whoever knows me personally and knows that I had knee surgery last year, thank you, MGMG. We really appreciate that.

David:              Ben has indeed been a trooper.

Ben:                 Yeah. Thank you, David. But all good now and excited to –

David:              You’re welcome, Ben.

Ben:                 Yeah. Excited to talk Snap. So if you like the show and want us to read your comment on the air, leave a review on iTunes. And we’ve also got a Slack. I just looked. We are 475 strong of people hanging out talking M&A, IPOs, tech in general.

David:              It has been so much great discussion on the Snap IPO.

Ben:                 Oh my God, yeah.

David:              Shout-out to everyone in Slack.

Ben:                 Yeah. And honestly, there’s a lot of good content on this show that came from the discussion yesterday. So join us, it’s fun.

So without any further ado, Snapchat.

David:              Yeah.

Ben:                 David, we were talking about this before the show but which we really only spent a couple of minutes I think on the history of the company. Listeners, if you listen to Episode 12, a lot of you I think have joined us since then but we talked about this “what if” acquisition where Facebook made a $3 billion –

David:              Famously made a $3 billion offer to buy Snapchat back in, shoot, like it was the end of 2013, right? Time runs so fast. Anyway, it was Episode 12 for the… as Ben mentioned, we’re not going to cover sort of all the story and drama around the founding of Snap which was then Snapchat in the early years here. But go listen to that episode. I listened to it again yesterday to get prepped. And if I do say so myself, I actually think it’s held up really well even though the show has evolved a lot since then. It's good episode. We recommend it.

Ben:                 Yeah, that was the episode. It’s funny when you do these things that when you do something new for an episode, it sort of raises the bar and you can never go back down. And that was one of the episodes where David and I did much more research than we had previously done before and kind of set a little bit of a new standard for ourselves. So, you know, I like that episode. I'm cursing it a little bit but I also feel like it holds up. So that’s part one of the Snapchat story, this is part two, and we’ll in all likelihood have a part three.

David:              I think the only thing that we know for sure going forward is there will be more parts to the story. It is not over.

Ben:                 Yes, yes.

David:              So with that, we pick up our story for Snapchat. Last we left them, it was fall of 2014. And Evan and Bobby, the lucky cofounders had fended off the previous year a $3 billion acquisition offer from Facebook. They had launched Snapchat stories. They hit 50 million daily active users. They just settled the famous lawsuit with their ousted cofounder, Reggie Brown, that we talked about a lot on the last episode. Interesting that that has been a total non-narrative in the IPO. I think I saw like one news story about him.

Ben:                 Yeah. Hey, it’s settled. What’s there to talk about?

David:              It’s settled. So things are going pretty well for the Snapchat founders and the company. Fast forward through the next two years, it kind of would have been easy for them to say “Hey, like we’re going to ride this gravy train.” But they have been pretty hard at work since then. They are not resting on their laurels. So since fall of 2014, in rough order here’s kind of what’s happened with Snapchat. They’ve launched Discover which then became Publisher Stories. They launched Lenses, they launched Geofilters, they launched a whole ton of new chat features which are actually pretty cool. And I probably use that more than anything else on Snapchat these days. They launched Memories, being able to save snaps. They acquired Bitmoji. They integrated that into Snap. And they launched Spectacles which we’ve talked about in Hot Takes in the past.

Ben:                 On top of it all, they’re now a hardware company.

David:              Yeah, on top of it all they’re a hardware company now. On the business side, they’ve also been hard at work. Revenue has grown almost 10x over the past year. But also this past October, October 2016 they launched their ad API which was a huge milestone that advertisers can now buy ads through partners and through agencies and buy at scale without ever talking to Snap. So, huge achievement for them. I mean, you can sort of say that the freight train has been rolling down there in Venice Beach in Southern California.

Ben:                 That revenue stat is interesting because in late 2014, that’s when they made their first dollar of revenue. So it's really only been just over 2 years and now they’re doing $400 million a year in revenue and obviously, all these multiples that we’re going to talk about are just absolutely bananas for any sort of comparable stock, public market stories that you would tell about it. But in two years to go from not monetizing your users at all to doing about 400 million in revenue is quite the acceleration.

David:              Yeah. Very impressive. But along the way, there is one thing that happens to foreshadow later in the episode here that we’re going to talk much more about later. In the last 6 months, their user growth has slowed and some say, many say that is a result of something else that happened in August 2016 – and that’s Instagram launched Instagram Stories. So, much more to come on that front later on the show. But a very important moment in the last year of Snapchat’s life. But undaunted, the proceeded with their much rumored IPO filing. Almost exactly a month ago, February 2, they publically file their S-1. It is pretty clear when you read this document kind of right off the bat that this is not your ordinary dry SEC S-1 filing. Others have talked about this including Ben Thompson but if you haven’t gone and read it, like we seriously recommend it. This is an incredible document. Whatever happens with Snapchat in the future, go read at least the Our Business section which starts on page 93 and we’ll link to this on the show notes. And we’re going to spend a lot of time talking about this document.

Ben:                 It’s incredibly compelling, concise, clear writing and the personality of the company just bleeds through.

David:              I would say almost I think this might be a watershed moment in thinking about something we’ve talked a lot about on this show, but like what is the tool of going public? Like you get to write this document and you get to speak directly to this huge audience base especially for a company like Snapchat is not currently your core user base and it’s a tool that clearly the company thought about it this way and is using it as such.

Ben:                 Yeah. So for listeners who haven’t read the S-1 because why would you go read S-1’s, but David and I did, and there’s a point where they talk about how part of Snapchat’s culture and ethos is that they’re kind. This is a quote. “When we say kind, we mean the type of kindness that compels you to let someone know that they have something stuck in their teeth even though it’s a little awkward.”

David:              This is amazing. Like could you imagine reading that in an S-1? Even, Ben, you said why would you go read an S-1. I really think this is a document worth reading for many, many reasons.

Ben:                 Also, the roadshow video. It’s like an incredibly well produced way that Snap really told their story. I'm not totally sure if it’s still available because I think they pull those things down after the IPO. But there’s lots of little clips of that floating around and it’s not just your standard person standing in a conference room next to a PowerPoint narrating it for a bunch of investment bankers. It’s really like a consumer grade compelling story.

David:              It’s almost like something that came out of Hollywood. Because it did. So we’ll get to the actual IPO pricing 2 days ago in a minute. But sticking on the S-1, the most surprising thing I think is just the nature of this document. But there are two other surprises in the document that I think a lot of the investor community wasn’t necessarily expecting. And the first one is that there’s a unique voting structure for the common shares that are being offered in this IPO. What’s unique about it is you don’t have a vote. So this has literally never happened before. Companies have gone public with dual class or even three classes of share structures that allowed management and founders to retain effective voting control of the company.

Ben:                 And David, those examples are Facebook and Google didn’t go public this way but have modified to sort of dual class structure?

David:              I think they did both go public with those dual class share structures.

Ben:                 Okay. And it’s something they learned from, is it the New York Times?

David:              Yeah. So historically a bunch of media companies have had this. News Corp has had it, The New York Times and a bunch of others. For whatever reason, it was in vogue with publishers and media companies at some point in the 20th Century. And tech companies have really sort of taken this tool and run with it. But this is breaking the ground here. So the thing about those other IPOs, Facebook, Google, even the media companies like usually there’s a 10:1 voting structure where each share of the founder’s stock or the CEO stock has 10 votes to every 1 of the public stock. There’s a market for those stocks if the founders and CEOs sell the stock, then you can buy that with separate voting shares. That’s important because not for individual’s voting necessarily but like activist hedge funds have made use of this to amass a voting bloc in a stock and then use that to agitate to try and get a representative elected to the board of directors. It’s been a tool they’ve used. So Snap says –

Ben:                 And for other reasons too. Like Carl Icahn has done this with Apple and I think with eBay to advocate for a buyback or a distribution.

David:              More dividends or all sorts of things. And there’s a view probably not unjustified that that's really an annoying thing that you want to avoid. But this is an extreme case of no, you get no votes. Not now, not ever.

Ben:                 What a baller move to say like hey, we’re going to sell, what is it, like 19 percent of this company and we think at this price point that even with no ability to have any influence even if all of you get together on the future of this company, it’s still going to be oversubscribed.

David:              What’s crazy is it’s not even just… there are actually three classes of Snapchat shares. There’s what they’re selling to the public, you get no votes. There’s shares that existing investor VCs have in the company, they get one vote. And then there’s shares that Evan and Bobby have and they get 10 votes. If Evan and Bobby ever sell their shares, then they automatically convert to the other investor shares. So there is one vote but essentially it's set up such that if something were to happen to one of them and they’ve actually filed proxies with each other – this is in the S-1 – if something happens to one of them, the other gets essentially full voting control in perpetuity of the company.

Ben:                 Wow.

David:              Crazy. So that’s one. The other surprise and this actually, I'm really surprised that this has not gotten a lot of press. There’s this thing, I don’t know if you saw this, Ben. This little thing called the “CEO Award” in the S-1.

Ben:                 This is new to me.

David:              What this is, I have never seen this before. So Even Spiegel, CEO of Snapchat, upon completion of the IPO on Wednesday, he got essentially a bonus of an additional 3% of the company after the IPO. So he already had a 24% equity share in the company and the company essentially gifted him as a bonus for completing the IPO. Another 3% even after the dilution of the IPO and so at the $17 IPO price which we’ll talk about in a sec, that’s worth $625 million that the company gave to Even for successfully completing the IPO. I’ve never seen this before.

Ben:                 That's a weird incentive. It would be interesting to see when… I guess once you’re already committed to going public, it sort of makes sense to incentivize the CEO of the company.

David:              Why would his incentives not be aligned? I mean, he owns 24% of the company which at the IPO was worth almost $4 billion. But somehow, I'm sure it will never come out but I would love to know how those negotiations went down.

Ben:                 Well, it’s him negotiating with the board or with the syndicated investors taking public?

David:              Well, it must have been everybody. But it has gone to a lot of press and I'm quite surprised about it. I could imagine the situation if you have an external CEO come into a company and you can incentivize that person by a bonus if they successfully complete an IPO. But this is where Evan is literally a founder and along with Bobby, the largest shareholder in the company. Very, very interesting.

Ben:                 Yeah.

David:              So, despite that, on Wednesday, March 1, two days ago as we’re recording this, Snapchat prices its IPO. They price it at $17 a share which is above the range that they had indicated of $15 to $16 which is there’s a whole theatrics to this. It was above the range –

Ben:                 But it could be below what the sort of murmur on the street was for months before, right? People were thinking more in that $20 range.

David:              Yup. And not that much. I don’t remember exactly what it was but not that much higher than the share price that they sold equity in their last private round at. But regardless, that gives them a $24 billion market cap at pricing and then yesterday on Thursday –

Ben:                 Which you’re right. That is an upround from their previous financing despite talks of that $14 to $16 per share range. Would have been a downround and that would have been kind of crazy because –

David:              That would have been bad.

Ben:                 Yeah, yeah. A whole bunch of recently issued stock options that are actually currently worth less than their stock price. If that had been the case, then there would have been a lot of finger crossing that the stock did pop and that by the time employees could sell it, when the lockup time ended, that it would actually be above the initial strike price of their option grant. But none of that is an issue. It actually did price above their last round.

David:              It did price above and like we said, at a $24 billion market cap at pricing opens trading yesterday and the market likes it. It’s a 44% pop on the first day of trading, closed the first day $24.48. Almost over 200 million shares were traded which is a lot. And the market cap, the valuation of the company at the end of the day, $34 billion. Then this morning, Friday morning, the market continues to like it. It’s up another almost 20% trading in the kind of $29 range. So, so far a successful IPO. We have not had any Facebook-like disasters.

Ben:                 No. And they did take longer to start trading yesterday but that was by no means because of a technical hiccup like with Facebook but because actually, despite the fact that the IPO price was $17, started trading immediately at $24. So the tradeoffs there when you look at who won and who lost, Snap left a good amount of money on the table, about a billion dollars on the table by not initially setting it in that $23-$24 range. Snap’s syndicated investors or bankers that took them public didn’t get their cut of that billion dollars. But everyone that bought the IPO at $17 got to take advantage of that short-term bump. And realistically, we’ll talk about this as we grade the IPO but this all really accrues as value to Snap because in getting this positive momentum, it’s great for hiring, it’s great for customers, it’s great for the story around the company that they went out and had the initial pop.

David:              The amount of those has been huge and that this by all indications thus far has been a quite successful IPO. It’s going to be great for the company. But that said, you know, this is a lot of mechanics here.

Ben:                 Mechanics and one day in.

David:              And one day in. Even though we’re lauding the S-1, a lot of it is pretty dry stuff. What we want to spend the bulk of this episode talking about and the really interesting thing to think about is like okay, what happens next? There’s all this buzz out there right now. People have all sorts of different opinions about Snap is doomed, Instagram is going to kill them or Evan Spiegel is a once-in-a- generation product genius. Where does the truth lie? So that’s what Ben and I have been thinking about over this past week and we thought the best way to do this is we’re going to introduce a new section to the show that we might use for IPOs going forward and we’re going to call this Narratives. Our idea is that there are really two narratives that are being told throughout an IPO. There’s the IPO process. There’s the narrative that the company wants to tell through their S-1, through their roadshow and all of the statements that they get to make both written and otherwise. Then there’s the narrative that pops up around it in the media, in the investor community, in the tech community, everybody reacting to what’s happening. So we thought, we distilled what we think are kind of the three most important points of both the narrative that Snap has been trying to tell over the past month and the narrative that the media and the investor press has been telling. And we’re going to talk about each of them and sort of judge how much we agree or disagree with them.

Ben:                 We are.

David:              So let’s start with Snap. You read the S-1, you watch the roadshow video and what immediately pops out and this got tons of press, but I think it was just a brilliant way of positioning that the company took. You read it and it says “we are a camera company.” They don’t say “we’re a mobile company.” They don’t say “we’re an app company.” They don’t say “we’re a social network.” Snap is a camera company. What do you think, Ben?

Ben:                 The first thing that came to mind. I’m reading a lot of the S-1 cynically so the first thing that comes to mind is, “Oh, I see. They don’t want to be comped against Twitter.” That makes sense. But the interesting thing as you start to read more and more and more, and this is my biggest takeaway from this whole thing based on the unseen, like let me just give a quick snap at their $33 billion market cap is trading at about 80 times their sales. Facebook IPO did like 28 times their sales. Even Twitter was like 56. We’re just in like off-the-charts territory for what their market cap is relative to the revenue that they’re doing. And when you start to peel apart like why are they saying they’re a camera company, the big thing that stands out here is that they don’t want investors to buy this IPO based on the product right now, the social graph right now, the growth rates in the last six months. Like they don’t want to be priced on any of that. They want you to believe that they’ve done these incredible innovative things, transforming what we think of as a camera and what we use cameras for. And they want you to buy on the idea and hold on the idea that they’re going to continue to do that and reinvent the camera for the future and that in typical Evan Spiegel Snapchat fashion, they’re unique and they believe that they are indeed a different and new type of company. They’re going to do things their own way and like, who are you to say what kind of company this is? They’re a camera company and you don’t even know what a modern camera company looks like?

David:              Well, you know what, I say this is brilliant. It’s such an unexpected and audacious statement to put out there that it captivates you and then when you read through the S-1 and you watch the roadshow video, it’s very compelling how they present it, you know, that sort of famously at this point, the first user manual for how do you Snapchat is the S-1 and they go through in just really exquisite detail about all the product thinking that has gone into how they’ve created Snapchat. But what it does and this is what I said when I introduced this, what it does by positioning it as a camera company is it completely draws attention away from what hereto for and still is the narrative on the media, investor and tech side of the aisle here about Snapchat, which is that they are a social network which is competing with the social network which is Facebook, Instagram, and WhatsApp.

Ben:                 Yeah.

David:              The other two things I want to say quickly about this idea and positioning of Snap as a camera company is one, it makes Lenses really interesting. So Lenses, obviously, it evokes a camera. But Lenses are the one sort of piece product feature that Snapchat has that Instagram doesn’t yet. What’s interesting is you read through the S-1 and I was thinking like, “Okay, how many people actually use Lenses?” Apparently, a third of Snapchat users use Lenses every day.

Ben:                 Wow.

David:              You read through and all the technology investments and infrastructure investments that Snap is making, a lot of that is going into the technology powering Lenses which starts to make you think about the next generation after mobile and augmented reality, and of course there’s spectacles. Is Snap kind of setting up using the IPO and their S-1 to set themselves up as being positioned for the next wave in tech and putting a stake in the ground that they believe that’s going to be augmented reality.

Ben:                 Oh man, yeah. It’s super interesting to think about when they say Snap is a camera company. Well, like Kodak was a camera company and then like today, is Apple a camera company? Sony and Samsung make the actual-actual Lenses that go in there. So, are they the #1 “camera” manufacturer in the world? You know, I’d be a little bit more skeptical Snap is saying they’re a camera company and except that they have, they actually do the full stack in making the hardware now of Spectacles and realistically, those are probably OEM’d in by the same folks that make the actual Lenses and the actual sensors that are in smartphones. But as you continue to extrapolate that, so let’s look at Apple as a camera company. We crossed over from like pure optics-based cameras into hybrid optics and software-based cameras like several years ago in the smartphone generation, there was such tiny little Lenses and sensors and they’re so close to each other. There’s not a lot of like actual physics that would produce high quality images and we have to do a lot of really tricky faking and kind of like post production and software that the user is never exposed to. And that’s suddenly with the iPhone 7 Plus become extremely visible with the fact that there’s two Lenses, that they never expose the fact that you’re switching from wide to telephoto. There’s just this smooth slider into 2x. And the thing that it’s really doing there is like it’s always in real time compositing a mashup of the two Lenses and doing a lot of really advanced computation on the fly, not just for portrait mode but always to be taking advantage of both of those Lenses.

David:              I think that's actually a great analogy to what Lenses in Snapchat are doing, right? Like that is augmented reality. And that requires a lot of processing power. Augmented reality thus far and virtual reality have been these really clunky things that nobody wants that cost a lot of money that it's unclear what you do with them, you know. But Snapchat just makes that really easy. It’s just all behind the scenes. And as we learn, we’ll talk about this in a minute, it’s costing them a lot in hosting fees and technology resources to be able to do that.

Ben:                 Yeah, totally. To close on that, I think when they say they’re a camera company, the world has moved to a place now where a camera is not just a physical thing. A camera is a full hardware/software services stack and that starts when you think about what a “camera” is that way and the fact that maybe it's a hardware or software services network stack, that starts to lend a lot more credibility to “Oh, I see Snapchat is really the full stack of the modern camera.”

David:              Yup. Should we go on to #2?

Ben:                 Yeah, let’s do it. So the second main point in Snap’s narrative that they’d like you to believe is that they are a brand advertising business which is fundamentally different than the gigantic elephant in the room – major ad networks on the internet right now of Facebook and Google. And what they’re really saying there is we are attacking TV, not print media. For anyone who hasn’t played around with the Snap ad platform versus Facebook or Google’s ad platforms, on Facebook and Google you can do pretty incredible targeting and you get to really finally get extremely granular on what type of demographics you’re reaching. Also, like when you’re using Google remarketing and things like that, you can track people around the web and you can do all sorts of things. Snapchat is a super, like at least right now, privacy first, we are not going to give you incredible targeting, you big broad swats like you would a television commercial and you just reach a bunch of people. So they’re fundamentally driving for scale there, the way that you need scale for brand advertising businesses. The other thing is that you can’t really click through a Snapchat. There’s no way with those Snapchat ads to land on someone’s site and have them optimize conversion rates and all these things.

David:              In the same way that Google and Facebook, with their app install platform, like that’s what they are.

Ben:                 Totally.

David:              They are conversion machines.

Ben:                 Yeah, yeah. It’s more like here’s a new Chevy. Think about Chevy a lot.

David:              Yeah. There are a couple of really, really important points here. One, Snap is making the argument here that as Ben said, they are going after TV, after television. They are not going after in a lot of ways the internet advertising to this point has been a reinvention of kind of the classified ad, the direct response. TV has persisted but TV is not measurable in anywhere near the same degree that traditional online advertising is. And it’s smaller. Like the number of people in the US who watch TV, it is large but relative to the number of people who use Google, who use Facebook, etc., it’s much smaller. But what TV has that Facebook, that Google don’t is engagement. And Snaps’ whole narrative around this is we have engagement. Yes, we’re smaller than Facebook. Yes, we’re smaller than Instagram. Yes, we’re even smaller than Twitter. But they go to great lengths in the S-1 talking about the average Snapchat user opens the app 18 times a day. This is on average spend –

Ben:                 For what, 25 minutes.

David:              Twenty-five to 30 minutes of Snapchat every day. They argue that that is the same level of engagement that television has historically seen.

Ben:                 Yeah. And we should call out that despite the fact that there’s way more time spent in front of a screen, be it desktop or a phone screen interacting with apps on the web than there is on TV, that sort of happened a while ago where people are spending more time on the internet than they are in front of a TV. But until 2017, this is the first year that this is actually going to happen, the ad spend has totally lagged it. So the ad spend on television has outpaced digital ad spend and finally we’re going to have this catchup where the dollars are 5 to 10 years behind the switch in engagement. So Snap is – I think they even say this in their roadshow video and possibly their S-1 that they really have tailwind here of the dollar spend from advertisers, they’re looking for a place in a digital format because that’s where all the ad buying is shifting because that’s where all the attention and engagement is. And they’re looking to buy this sort of incredibly broad Coca-Cola style, blanket the entire world with advertising for their brand. They’re looking for a place to deploy those dollars and produce the effect that they’re used to spending. And brand advertising, I actually don’t know the numbers but it’s significantly larger than this direct response advertising that’s dominated the web to date.

David:              Yup. So then let’s jump to the third. And the third critical piece we see in Snap’s narrative which is really taking one, we are this revolutionary camera company. We are not what you think we are. We’re a new vision and we’re going after this market that is very different from what other internet companies have gone after before. The reason we’re able to do this is that our co-founder and CEO Evan Spiegel is a once-in-a-generation “product genius.” And this has been a narrative around Snap for a long time.

Actually again, to plug our previous episode – shameless self-promotion here – the previous Snapchat episode, we actually dived into Evan’s history and he’s not just some random kid who dropped out of college to found another app company. It was pretty clear from his early days at Stanford that he had some very special talent. He talked his way into the D.school which is normally reserved only for graduate students and is probably the most famous design school in the world. David Kelley who founded the D.school and was the founder of IDEO, the consulting firm, ended up becoming Evan’s direct advisor. And Scott Cook, the chairman of Intuit and famous Silicon Valley luminary, he met Evan while he was at Stanford. He hired him immediately to help work on a product that he thought was super important at Intuit. He does have a lot of talent. And that is on display in the S-1. I mean, you read the product section and like Ben was saying, it’s some of the most clear thinking, really compelling understanding of users and problems and why Snap’s product, why their products are built the way they are.

Ben:                 Totally. We should also call out, they talk about… they don’t really in the S-1 talk about Evan Spiegel as the product genius. That's sort of like the hint-hint, nudge-nudge and like the way that the media has sort of spun this but they talk about Snap as an innovation company and that we as a company have done these things. They definitely don’t refer to him as like a once in a lifetime product genius, but the implication is totally –

David:              But that’s clearly what they want to imply.

Ben:                 Yeah. They have an Apple-esque secrecy about them but it would be really interesting and we’ll probably hear this in the ensuing decade from folks that have left Snapchat to kind of talk about what is the product development process there and does it sort of all come from the top or are there a lot of trusted lieutenants. I do know from just kind of talking to a couple folks there that they do the kind of old-school Microsoft-style thing of having internal teams that compete. And actually the same way Apple think too with two different teams working on the iPhone at the same time where a vision is laid out and there are two people working in secret that don’t know what the other person is working on, kind of leading very small teams that are seeing who can better fulfill that vision. Often you don’t necessarily know that that there’s another person working on the same thing that you’re working on but there’s definitely this notion of what we’re doing requires a lot of creativity and a lot of invention and a lot of newness, and that comes from multiple people exploring different incarnations of the same vision.

David:              So that Snap’s narrative here. One: We’re a camera company; we’re not a social network. Two: We’re a brand advertising business. We’re attacking TV; we’re not attacking Facebook and Google. Three: We as a company and our co-founder Evan… And actually, if you watch the roadshow video, Bobby Murphy the CTO and cofounders is super elevated in that as well. So it’s wrong to say just Evan. But Evan and Bobby are, you know, this team is once in a generation. We are the next Apple and Steve Jobs here. That’s the Snap narrative.

Let’s talk about the media and investor narrative.

Ben:                 Actually, taking a quick pause, I never even… You know, we were laying out the structure of this episode and I’m formulating my thoughts, I didn’t really realize that the picture they’re painting by taking these little “we’re product innovators and we respect your privacy and we’re a camera company and we’re not a software…” like all these things are like “we’re the next Apple.” Like comp us against Apple, don’t comp us against Twitter.

David:              Exactly. There’s just one problem with that and that’s that Snapchat is an advertising-based business, not a consumer products business at least today, which is the perfect lead-in into what the slightly more skeptical investor narrative is. And point #1 here which anybody who’s been following the stories will be unsurprising is “Hey, Snapchat has a growth problem, a user growth problem and that problem’s name is Instagram.”

Ben:                 Yeah, there’s a pretty interesting graph of their user growth that looks like an S curve. Kind of slower in the beginning of 2014, speeds up, you get a nice steep slope until about, what, Q2 of 2016. Then you have like three quarters in a row of kind of like leveling off and that really aligns kind of coincidentally with the –

David:              The launch of Instagram Stories.

Ben:                 Yeah, exactly.

David:              Which Kevin Systrom says like, “Hey, Snapchat invented this format and we are taking this format and we are bringing it to our network because we, the Facebook Universe, is the dominant social network. And yes, Snapchat will tell you they’re a camera company but… You share your pictures with your friends and we are the friends’ company.”

Ben:                 Yeah. It’s interesting, to give a little bit more context too. So Snapchat has, what, like 160 million active users, something.

David:              Snap has 158 million daily active users.

Ben:                 Daily active users. When you look at that, it totally pales in comparison to Instagram and Facebook proper. But the important delineation there is that it’s basically domestic versus international. Like Snapchat has got real good saturation in the US. They have very, very little adoption in other countries. Not only do they not have great adoption but they’re not monetizing well elsewhere anywhere.

David:              Yes. Very true but this is where the rubber really hits the road. Since Instagram launched Instagram Stories to compete much more directly with Snapchat product-wise in August 2016, from the quarter before then until now, Instagram has added 100 million daily active users. They went from 300 million to 400 million in seven months which is an acceleration of their growth, a huge acceleration. In that same time, Snapchat has flatlined. They added 15 million DAU in the same period, which is much lower growth than they had earlier than that. So like this is not a good narrative for Snap.

Ben:                 So then the question is if you start to think about sort of what each of these companies has going for them, Facebook and Instagram have a structural advantage where they can by their time and weight and know that they have great teams that can implement these features in an appropriate way for those platforms and then get those insane 100 million DAU spikes like that by figuring out the right way to incorporate that mechanic into their product.

What Snapchat has going for them is they fundamentally believe that – or I guess to invest in Snapchat right now and we can revisit this later in the conclusion – you have to believe that Snapchat can do things that are more innovative and more interesting in a product sense for new users, then Facebook will be able to leverage their structural advantage in the industry and copy. So what that sort of comes down to is because I don’t think there’s necessarily like a time window advantage. Let’s say Facebook copies everything 3 months or 6 months after Snapchat. I don’t think that Snapchat is going to have this advantage of like they’re going to get out ahead and they’re going to get enough users in that short window. I don’t think that’s going to happen. I think the thing that you have to believe is that Snapchat can figure out a thing to do that gets a whole bunch of new daily active users, that Facebook is not in the position to copy, that having that existing network and those existing products doesn’t give them the leverage to keep building these roadblocks for Snapchat.

David:              This for me is really in our episode that actually is going to come out after this but that we recorded earlier this week, our crossover episode with the Internet History Podcast coming out next week. Thank you, Brian. That was a blast. But I talked about how in the Uber-Didi episode we did with Brad Stone, this episode and that one that’s coming out next week really has made me think about competition and moats. And man, does Facebook and the Facebook App Universe including Instagram, they have this enormous moat. If you think about this as a competition between social networks, Facebook is the social network. They have it, it exists. Then you look at where is Snapchat’s core user base. It’s in pre-teens and then teens who were building their social graph online for the first time and they could build that on Snap. But Facebook has literally the entire existing world. So Snap can go after the young folks and they have certainly made inroads and Facebook is definitely paying attention. But Facebook and Instagram have everybody that they can bring. They can bring a gun to a knife fight.

Ben:                 I continue to think like will Snapchat be able to come up with something where that’s actually not an advantage.

David:              Exactly.

Ben:                 Imagine like there’s a battle in a canyon and there’s the incumbent that’s got 100,00 soldiers that are all blocking the middle of the canyon, is there something where like Snapchat can get up on the side of the canyon and tiptoe along and even like Waltz past all them and they can’t do anything about it because they can’t get up the canyon. Like is there another dimension here other than tons of users that are already using that app on their phone that is just going to completely blindside Facebook. Is it a new hardware that they’re not on? It’s hard to imagine what these things could be but the dollars into Snapchat I think have to be a bet that they will figure that out.

David:              Yup. I think this gets at the heart of what Snapchat is trying to say, which is “we’re a camera company.” To be a bull on Snapchat right now, you have to believe that they are going to basically pivot the market into a dimension that Facebook can’t compete with them on and they are doing that, like they have Lenses. Facebook and Instagram can’t match them on that. The technology is fundamentally better and different with Snapchat. But, when you start thinking where does that play out, does that lead us into augmented reality, well of course Facebook has Oculus. But I would also say they have stumbled a bit. So it is a much more even playing field there. But I think that’s the bet you have to make if you’re going to bet on Snapchat right now. That they’re going to outrun Facebook into this new paradigm.

Ben:                 Yeah. Perhaps one of the things or actually the criteria that we evaluate if an IPO was successful or not, which actually we won’t be able to fully do on this episode since it’s so recent but what did that capital infusion, in this case the $3.4 billion that they raised from selling those shares, what does that capital infusion allow the company to do that they wouldn’t have been able to do otherwise? Like did they effectively use IPO’ing as a vehicle to raise capital to go do something new as a company? Maybe it’s to do new hardware stuff. Maybe it’s to figure out what that next frontier is.

David:              Well, they’ve already shown they think of themselves as a hardware company.

Ben:                 Right. I think actually now they’re selling it’s not just the vending machines with Spectacles. I think they sort of quietly stood that up online and you can order and ship now.

David:              I think that’s right. We’ve rattled on that but really quickly to cover and then wrap up on narratives, there are two other aspects to the sort of press narrative about Snapchat right now. One is that Snap has an infrastructure problem and it came out as part of the IPO that they’ve agreed to pay Google – they primarily run on Google Cloud Engine – $2 billion over the next five years. They’re also paying Amazon AWS another billion dollars to supplement that with AWS. As a result of all this spending relative to the still large and impressive but minor revenue they have compared to Instagram and Facebook, Snapchat’s actually gross margin negative or was until very recently. So their infrastructure costs were higher than the revenue they were making from advertising and that's before even paying any of their payroll cost or their hardware cost.

Ben:                 Yeah. In fact, the losses are so huge. This may actually be the first company to file for an IPO that has a cost of revenue alone higher than revenue in the trailing 12 months before IPO.

David:              We joked on the Uber-Didi episode about ridesharing going gross margin negative like, well, Snapchat is gross margin negative as well or was until very recently.

Ben:                 And it’s almost entirely due to infrastructure cost. I think a second cost there is rev share to publisher partners. But I mean the cost of revenue in 2016 was $452 million. So, a large amount of that, I mean if you figure out how much they’re paying to Google year over year, a lot of that is for the Google Cloud infrastructure. I think the way that Snap wants you to view this is we are paying a lot of money to stay nimble right now. Like people that are pushing back in Snap would say, number one, why don’t you have your own infrastructure by now, why don’t you invest in your own data centers. Number two, how the heck are you using so much compute in Google’s data centers; why is it so expensive on a compute per user basis. And I think it’s just the nature of all this really advanced augmented reality stuff that they’re doing completely on the fly.

David:              I think it’s Lenses. Well, I think it's a combination of Lenses and the fact that they are delivering and storing just an enormous amount of it’s not photos, it’s video on Snap. I mean, their bandwidth costs are enormous.

Ben:                 Yeah. And the thing you have to wonder is also the thing you would have to believe as an investor to want to do this is does paying a ton for Google to handle their infrastructure and keep that completely outsourced, allow them to try things faster which is the true kind of inherent value of the company is that they can experiment, get things right and roll out really good products quickly. Like do you believe that and do you believe that it’s worth all these computationally expensive things that they’re doing on a per user basis. Because the cloud cost, it’s not like those are fixed and that it will be amortized by all these users coming on. That scales linearly with users, yeah. So number one, I think you have to say is it worth it to be paying that on a per user basis. Number two, should they be paying that premium to keep it outside of the company so they can move.

David:              Then so that’s the second part of the press narrative. Then the third part is actually I think, Ben, when you look at how the IPO performed when it priced above the range and then traded up, had the 44% pop yesterday and is trading up again on day two, I think the third part of the world at large narrative is that yes, despite those problems, Snapchat and Evan and Bobby really are fundamental product geniuses and they deserve the credit that they are lavishing on themselves in the IPO. But I think the market has shown over the last two days that they’re willing to give Snapchat a pass for now but they better deliver soon.

Ben:                 Yeah, sure. I mean, the frenzy and the excitement that I'm attributing all of the oversubscribing nature of the IPO, the pop and trading, the pop the next day, like we just haven’t had a big IPO in tech since Twitter. I think this is really, you know, this is a great stat. The 15 US-based tech companies that went public in 2016 raised a total of $1.44 billion and Snap raised 3.4. It was the first social media –

David:              All at once.

Ben:                 Yeah. The first social media IPO since 2013 and Twitter. It’s the first tech IPO of 2017. There’s incredible pent-up demand. So I’m going to evaluate the massive volume of people buying shares at pent-up demand but I think –

David:              But I think the rationale that you have to believe to buy those shares is that this is a special company and if you just look at the numbers and you compare it to and you think it’s a social network and you compare it to Facebook and Instagram, it’s not a special company. It’s actually a pretty bad one by the numbers.

Ben:                 And here’s the craziest thing, too. Like they’re gross market margin negative, we’re making bets on the people theoretically coming up with future products that haven’t been invented yet and we’re buying on a story. That to me doesn’t sound like an initial public offering. It sounds like a seed deck. It sounds like if I'm in a venture firm, those are the things that I look for, like team, like product sensibilities, like these are the things that I would write a 1 or 2 million dollar check for for somebody that hasn’t built anything yet. Not the sort of ways on which I would be evaluating a public security.

David:              That's such a good point and I think… man, thinking about this this way, I think nothing better encapsulates the time in which we’re living in tech where an IPO prospectus and process looks like a seed deck and a seed process. I don’t know if that’s a good thing or a bad thing. But that is the reality in which we live today.

Ben:                 I'm getting all worked up over here and actually, I agree with you. Like even though –

David:              But it is, like this company was gross margin negative. I want to just highlight this. This company was gross margin negative. That means they were selling dollars for 50 cents or 90 cents or whatever until like a couple months ago. They are now a 35 billion plus market cap public company.

Ben:                 It’s not just like Twitter where they weren’t profitable because of their massive operations and then actually Twitter never became profitable.

David:              Right. Like going public without being net income positive is a common thing. But going public while being gross margin negative is a very uncommon thing.

Ben:                 Yeah. David, if you have any dollars to sell me, I got 50 cents for you and go run a business off that revenue.

David:              All day long, Ben. I am a VC. Anyway, so the point of all this, we’ve spent a long time on this section, and listeners, let us know what you think of it, but I think what’s just so fascinating about this event and this company is you can paint it as Snapchat has very effectively as this is the future and this is the most compelling, most interesting company to hit the public markets since Facebook and that we are riding a very different wave than Facebook. Or, you can paint it as like this is the beginning of the end here. The moment that we’re at right now is just so interesting because there are great arguments on both sides.

Ben:                 Yeah. I think the best way to summarize it is this is a public market sitting down with Evan Spiegel at a table, looking him in the eye and saying, and Evan saying to public investors, “Do you trust me?”

David:              Exactly. And going back to the start of the show, Evan getting this bonus, this huge bonus of almost more than $600 million in stock grants for a successful IPO, it's really coming down to that.

Ben:                 Yup.

David:              All right. Should we move on quickly to the rest of the show, do What Would Have Happened Otherwise?”

Ben:                 Yeah. I mean, the thing I'm sitting here wondering is, do they have to go out now? Could they have continued to fund their operations by what they had in the bank, raising more private money? Is it advantageous for them to go out? I would love to hear your thoughts on that.

David:              They had no choice. I mean, they were burning money. Where did I put the… I had the numbers in my notes. I don’t have them offhand but I think Snap had even after the huge amount of money they just raised in the private markets like less than a year ago, they had just about a billion dollars in cash on-hand and they burned free cashflow of almost I believe $700 million last year. That’s I'm sure going to be even larger this year. So like they were going to be out of cash if they didn’t get this capital infusion, one. But two, also, I think like we’ve talked about, like this was their opportunity and this was the time for them to tell their story.

Ben:                 Yup. I guess the name of the section is “What Would Have Happened Otherwise?” So we have to sort of explore other options. Could they have been acquired and who would have acquired them at this point? They’re 10 times more valuable than the last time Facebook tried to acquire them. But I mean, for what they dumped on WhatsApp, let’s say it’s the standard public market to 40% premium. I think, what was it, they went out at a $24 billion market cap. So, what, like 33, 34, 35, would Facebook have paid that much for them and will they have accepted it?

David:              I don’t know. I mean we ended our last Snapchat episode with… you know, I was arguing that we’re asking the question should Facebook have offered more to try and buy Snapchat back in 2013. And I argued no because just this division in the culture of Snapchat and their vision of their product is just anathema to what Facebook is. And we’ve seen that play out even more so now. I mean, Facebook, they have Instagram, they have Instagram Stories that’s doing great. Instagram is growing faster than ever. Why would they pay $35 billion for Snapchat right now?

Ben:                 Yeah.

David:              They have Oculus.

Ben:                 Yeah. Let me throw in another hypothetical future for you, and this could still happen. So this is not somebody buying Snapchat but rather the reverse. So we live in a world where Google and Facebook are the vast majority of social network-based advertising that’s being bought and they’re totally eating into all programmatic and display also. They’re mega giants. And Facebook gets these economies of scale for their advertisers by adding additional networks into the portal. So they have channeled these advertisers, the advertisers are used to buying ads on Facebook, they buy Instagram and then suddenly, bam, now I can also just upload a different image size and advertise on Instagram too. So what is Snapchat’s way of getting into that competition, is starting to aggregate anyone that’s left. So right now, Twitter is valued at $11 billion. Their market cap is $11 billion. And that's probably too high. Like if that was lower, then somebody would probably actually pick them up but right now they’re kind of priced too high for anybody to feel good about that purchase. If they continued to topple, Snapchat’s got new money in the bank, they’ve got this really, really high market where they could do a stock deal, like what if Snapchat bought Twitter and then enabled advertisers to have a single portal to buy advertisements on both platforms and then sort of win on a spree. It feels completely antithetical to me to Snapchat’s DNA and perhaps there actually is no economies of scale since those ad formats are so different. But it sure paints an interesting picture of what could Snapchat start to do with this cash they’ve just raised and this concrete public market validated valuation.

David:              That's really interesting. I think what another interesting question is, what if it’s not Twitter but what if it’s Fox or what if it’s a television media company that Snapchat would buy.

Ben:                 Well they’ve got that relationship with Viacom. I don’t know if that still exists but Viacom, I think they might have dissolved that but Viacom was there channel sales for a while for all the Snapchat ads.

David:              Yeah. I mean, Snapchat is they are an LA-based company. The chairman of the board is, I believe, is it Michael Lynton I think who was the Sony entertainment CEO. And in many ways, Hollywood and media and television is as core to Snapchat’s DNA as Silicon Valley in tech is.

Ben:                 Totally. Before we move into tech themes, and this is right on the border of what would have happened otherwise in tech themes, was this the right way for Snap to go out and did it get them the right investors. So what I mean by that is Snap is company that even more so than any of these other tech companies is going to potentially have a real tough time with these quarterly earnings and if they got themselves a bunch of retail investors that were short-term and excited for the pop and got in because there was all this excitement and demand, and they didn’t get this long-term investors… like here’s the counter example. Amazon was extremely clear in their S-1 and somehow built this incredible investor base who is willing to wait decades for them to start being profitable.

David:              Yeah, it's that great line that Tom said on our episode, that Jeff always says, you get the investors you ask for.

Ben:                 And big question for me here is, did Snapchat ask for the right investors? Did they get the right investors and will they be able to stand up to the scrutiny of quarterly earnings calls for those investors.

David:              Here’s where it comes back though to the beginning of the show, the investors they got. What do they not have? They have no say in the company whatsoever.

Ben:                 That’s right. It matters in the sense that like their share price like –

David:              Well yes, of course they have a say in the share price but Snap just raised all this money that they can use to fund all the product development for the next at least couple of years. They have this room to run.

Ben:                 Honestly, they basically raised 1.5 of their –

David:              They just used their brand, yeah, for their next wave that they’re tackling. Interesting questions. Should we move on to tech themes?

Ben:                 Yeah. Let’s do it.

David:              We’ll be quick here since we spent so much time on and I feel like covered a lot of this in the rest of the show. But for me, the biggest one here thinking about all this was just what we’ve talked so much on this show of waves and technology waves and thinking about how Snap very clearly despite what they’re saying in their S-1, they started with the mobile wave and they were a social network on mobile. But the future of Snap, if it will be the one that they want, is going to be them riding a very different wave. And I'm just reminded of two things. One, the Facebook story and our Facebook IPO episode and how Facebook was riding the Web 2.0 wave and then realized through the IPO process that they needed to paddle over and conquer the mobile wave. I wonder and it seems to me very clear that something similar is going on with Snap right now.

Ben:                 Yeah. And they’re paddling over into the AR wave, is that what you’re…

David:              Well, whether it’s AR or, you know, I don’t know yet how we’re going to characterize this wave but it is, well, I think Snap says it really well. It’s the camera wave. It is when a camera becomes about inserting technology into the world around you.

Ben:                 Yeah. That's interesting. Most of my tech themes we’ve covered, a lot of like winner-take-all network effects and the ability to copy well, cord cutting, moving from TV to mobile ephemerality, how it’s the anti-Facebook, you can really be yourself. But the one that we haven’t really touched yet is that the viral coefficient of Snapchat is different than the more successful social experiences like Facebook. To me, a big risk factor is that their key product pro is also potentially their key business con where on Facebook and LinkedIn and Twitter, like it’s a follower grab. I am directly incentivized to have a wider audience because the way that you use those platforms is to try to get as much engagement as you can on those platforms. Like it’s called social media because it’s truly media. It’s you speaking to an audience. People engage with you but it’s more media than communication. With Snapchat being more communication, and the way I use Snapchat is there’s like 5 to 10 friends that I snap with at all and that happens in kind of a power law distributed way where like maybe that’s not exactly the right mathematical distribution but like there is one person that I snap with the most than a few other people that are kind of, then the rest of those 10 are not that much. So the reason why I think their product has such high engagement but like the issues that we’re talking about are in growth, or the fact that the product itself lends itself really well to engaging a bunch with a very small set of users which isn’t great for growing into new markets. So as we start to think about the network effect here, like the fact that there’s a ton of people in North America using it and some people in other markets using it, it doesn’t necessarily mean that it’s going to catch on in Belarus because there’s nobody in Belarus that has somebody that wants to snap them somewhere else because it’s all about these small pockets.

David:              It’s interesting. You’re seeing apps like Snow which I believe… is Snow part of line, I think?

Ben:                 It’s the Chinese Snapchat.

David:              I think it’s either Japanese or South Korean. But anyway, it’s that. It’s the Asian Snapchat. It’s a really good point. It reminds me of Uber versus Airbnb. Like Airbnb has a very clear global network effect –

Ben:                 Because people travel.

David:              Uber, not so much. This is something similar happening here.

Ben:                 Yeah, totally. We talked about it with Brad Stone, listeners, on the previous episode. Brad made this great point that Airbnb actually is a stronger global network effect than Uber does because with Airbnb, you’re traveling to all these places. You’re bringing Airbnb to new places. You’re looking for Airbnb in new places. And with Uber, other than the technology being hard, there’s not as much of a network effect moat because how hard is it really to download whatever the version of Uber is and then in another city, and that’s why we’re seeing all these clones get so much traction.

David:              Yeah. Maybe I’ll pile on with one more real quick tech theme but while we’re talking, that episode with Brad too, it was such a treat to have him on. Can’t recommend it enough to listeners. But one of the concepts he talked about was that there as this idea in ridesharing that raising capital was a moat and an advantage, and it turned out not to be. And looking at Snapchat, it made me think about that as well. Snap has raised so much money and now with the IPO even more money. But still, they were gross margin negative. That hasn’t helped them build a great business thus far.

Ben:                 Yup. All right. Should we grade it?

David:              All right. Let’s grade this sucker.

Ben:                 Cool. So listeners, we should again clarify that we are grading on the criteria of what will this move allow them to do. Like was the IPO a good move and did the idea of doing this IPO, number one, was it well executed. Number two, does it put them in a good position. And so I have to set aside a lot of my feelings of the company in general. Like if I feel like they’re set up for success and they’re not way ahead of their skiz in terms of the… well, actually I guess they’re related because the fact that they’ve got a market cap that is so ahead of revenue is totally tied into this. But I guess the point I'm making is, if they were going to IPO and they needed to IPO, they did it extremely well. I am an A on execution on this thing, so far a day in, and their ability to raise the capital that they fight or flight, do or die, needed to raise and do it at least so far really well. I think that’s an A with like a ridiculous amount of variance. I thought about, David and I were talking about before the show like should we even grade it. I think that it’s too early to tell but an A on execution, an A on what it sets them up to do in the future, staying nimble, potentially making interesting acquisitions. I don’t know actually how this will help them grow into new markets. I think that’s still the biggest scariest thing for me. But in terms of how to go raise money and the way that that best sets them up for success, this is an A.

David:              I think the parallels to our Facebook IPO episode are just so great right now are so perfect and so apt. We graded the Facebook IPO and I think we gave it two grades – a grade for the actual IPO itself and then a grade for how that event influenced the trajectory of the company over time. And the IPO was terrible but what we learned from that story was that experience really made Facebook what it is today kind of drove them to much further greatness. I think I completely agree with you, like this IPO was brilliantly executed by Snap. They told their story so well and positioned themselves perfectly. One need only look at how the performance has gone over the last two days, granted it’s still very early but versus Facebook’s first two days. But the question and the real grade that matters, we’re going to have to come back for at least round 3, it not 4 and 5 down the road on this one.

Ben:                 I totally agree. I almost feel silly for giving it an A. Like there’s just so much variance and so much we don’t know.

David:              But I think we can definitely grade execution on the IPO and no question, this was an A. There are huge headwinds here with Instagram stories launching and growth slowing and being gross margin negative. They have spun this great story about Snap as a camera company, Snap as a brand advertising company, Snap as the most innovative and interesting product company of our generation. And it’s worked really well.

Ben:                 Totally. Before we move on to Carve Outs, I have a couple little kind of fun points to note about this IPO. One is that there’s a great Chris Sacca tweet from yesterday where he points out that, he’s like, “Congratulations to Snapchat but guess who’s not celebrating and making it big from this IPO?” And he goes, “Me, the guy that didn’t answer this email.” He has this email that he just has unanswered in his inbox from Bobby in 2013-2014?

David:              I think it was even 2012.

Ben:                 Yeah. Saying, “Hey, really enjoyed your talk. Would love to have you in the office and chat.” It’s a reminder of what a crapshoot seed stage investing is.

David:              Totally.

Ben:                 We’ll put a link to that in the show notes. Then another one is really interestingly, so you get this sort of 24-hour window to go and talk publicly about all your financial stuff after your IPO before you start being really held to all the SEC regulations about what you’re disclosing and when. And normally, you see all these execs taking advantage of this going out on all these different shows and talking to media outlets on the day of their IPO, drumming up support for it. And all the other execs weren’t anywhere to be found. They headed over to Goldman Sachs which was one of their IPO managers and it wasn’t their lead left because Morgan Stanley led the IPO, and they hung out there for the day. They did one interview with the LA Times to kind of promote the LA startup ecosystem. It’s just like it’s going to be Snapchat. They don’t do things the way everyone else does things.

David:              I think if there is one lesson from the whole, all of Snapchat’s story thus far is exactly that.

Ben:                 Yup. Cool. Should we move into carve outs?

David:              Let’s do it.

Ben:                 All right. So listeners for Acquired, we’ve done three episodes this week. We did the episode with Brad Stone, we’ve got this one and then shortly hereafter we’ll have a super cool episode with Brian McCullough from the Internet History Podcast as a crossover. So I have not been doing much as reading as I’d like to this week but I did listen to Ben Thompson on the Bill Simmons podcast, and I haven’t listened to the Bill Simmons podcast in a while. It’s so freaking good. Like it’s largely about sports so if you don’t like sports, most episodes won’t apply to you. But number one, the episode with Ben is great. Bill has these incredible sports analogies so he compares Twitter. Twitter is like the Milwaukee Bucks of tech companies and they have this great analysis of that.

David:              That's great.

Ben:                 It’s just so –

David:              What’s Snapchat?

Ben:                 I don’t know. I don’t think they got there. See, they’re the Cavs or the Warriors or maybe it’s the team that will dethrone one of them. I don’t really know.

David:              Yeah. Instagram and Snapchat, who’s the Cavs and who’s the Warriors?

Ben:                 Right, right. But that episode is great. Malcolm Gladwell is on a few episodes back that was really great. He’s just such an enjoyable personality to listen to and I feel like, honestly, David and I as podcasters are always looking for who’s producing really great content and how they’re doing it and things we can add to this show, so I know that I’ve definitely taken a page from Bill’s book.

David:              Yeah. Mine, I’ll do real quick. But I started listening to Sun Tzu’s The Art of War this week on audiobook and I finished it because it’s incredibly short, which I had forgotten that I read it a long, long time ago.

Ben:                 That's so appropriate for Snapchat.

David:              So appropriate because as we talked about on the last episode after Zuck came down to LA and I can’t remember if it was when he offered to buy Snapchat or when he said “Hey, we’re going to launch Poke and we’re going to crush you.” I think it was the first time when he said “Yeah, we’re going to launch Poke, we’re going to crush you.” Evan went out and he bought copies of the Art of War and he gave them to each one of his employees. But it's such a good book and applicable as much ink has been spilled to business and so many other things in life but the coolest thing about it and I think what a lot of people don’t appreciate about it is that the book is about not fighting and that the idea that the best victory that can achieve is a whole victory where you don’t destroy the other side, you capture the other side. And that actually fighting and actually entering into battle is terrible because even if you win, you’re damaging what you want to capture and you’re sustaining damage yourself. I think it’s just so apt for when you think about how Snap has played this whole, you know, the past couple of years really but this whole IPO process – we’re not going to fight Facebook directly, we’re not a social network, we’re a camera company. Like it's got Sun Tzu’s fingerprint all over it.

Ben:                 Love it. That’s perfect.

David:              Indeed.

Ben:                 I think that’s our show. Listeners, thank you so much for joining us. We love iTunes reviews. Leave us a good one and we’ll read it on the mailbag next time. It helps us grow the show, it helps us bring on more sponsors potentially. It helps us bring on better guests. It helps more listeners find us and set the flywheel in motion, so we really appreciate that. Any sharing you want to do, Twitter, Facebook obviously, all those things help. Snapchat – it’s actually unclear if it helps since it’s unmeasurable. Join us in the Slack. Go to Acquired.fm. It’s pretty easy to join. A little sidebar on the right. We have great conversation there. And lastly, thank you so much to this episode’s sponsor, Silicon Valley Bank. Until next time.

David:              We’ll see you next time. Thanks, everyone.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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