Moneybox

The Donald Trump of IPOs

Snapchat’s offer to investors is brazen, disrespectful of norms, and powered by low-information consumers.

Photo illustration by Natalie Matthews-Ramo. Photo by ET-ARTWORKS/Thinkstock.

Photo illustration by Natalie Matthews-Ramo. Photo by ET-ARTWORKS/Thinkstock.

Snapchat has given us the first blockbuster initial public offering of the Trump era. The social app’s parent, Snap Inc., which cheekily describes itself as a “camera company,” filed its initial prospectus last week. Should the IPO go off as planned, Snap could raise up to $3 billion, giving it a valuation of about $20 billion.

The timing has some poetry to it. President Trump may be a Twitter guy, but he’d likely find a kinship in Snap’s product, corporate culture, and mode of corporate governance. And it’s the most Trumpian qualities of Snapchat and its IPO that make them fascinating.

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Let’s count. Snapchat’s core business model and its claim on the fickle attention of addled, low-information consumers (read: the youngs) rests on enabling people to send impulsive, often vulgar missives that then disappear. Snapchat users, in other words, exercise their raging id at all hours of the day while avoiding accountability—Trump’s M.O. for years. His greatest trick as a politician might be to make his transgressive tweets and outrageous statements disappear in the minds of his supporters, even when they are captured on tape.

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Like Trump, Snap founder Evan Spiegel has his own history of unfortunately recorded locker-room talk—sexist texts and emails sent as a Stanford student, which he has since apologized for. And as it enters the public market, Snap (which has not only its flagship app but its new Spectacles glasses) is also departing from the typical norms surrounding formal, ritualized communication. The Snapchat prospectus is undoubtedly the first in history to contain the words sexting and poop. (“And we eat, sleep, and poop with our smartphones every day,” it reads at one point.)

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The company, like our president, relishes confronting the haters and doubters. As the prospectus notes: “When we were just getting started, many people didn’t understand what Snapchat was and said it was just for sexting, even when we knew it was being used for so much more.” (More coincidentally than anything else, Spiegel also happens have found a foreign supermodel as a life partner, just like Trump.)

Snapchat gambles it can use its celebrity and star power to brazenly violate accepted norms of good governance. Companies such as Google and Facebook have dual-class share structures, under which the founders have shares with special voting power that dilute the ability of common stockholders to influence corporate events. Snap is taking that one step further. The shares it wants to sell to the public will carry no voting power whatsoever. Public companies run on the notion that managers are agents for the people who actually own the economic interest in the company, just as voters historically presume the people they elect president will work for them and not retain ties to, say, their own businesses.

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But Spiegel is effectively setting himself up as CEO for life. And the control of his voting shares will persist for nine months after his death. Speaking to the Financial Times, Anne Simpson, the head of corporate governance at pension fund giant CalPERS, characterized Snap’s corporate governance as a “a banana republic-style approach.” It’s as if the company’s leaders view people’s election to participate in the IPO as the only moment of accountability. Sound familiar?

Finally, there is the matter of the managers’ skills as businesspeople. Snapchat is supposed to be a fantastic business, a huge moneymaker, bigly. Which is why it resisted Facebook’s $3 billion takeover offer in 2014. Now, Snap has only just begun efforts to monetize, and it has had some success. For 2016, it reported $404 million in revenues, up sharply from $58 million in 2015, but expenses were more than twice revenues, at $924 million. The company’s net loss for the year was $514 million.

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Of course, Facebook and Google faced similar mismatches between revenues and costs early in their lives and grew their way out of it. The playbook is to supercharge revenues growth while gradually clamping down on costs. But Snap’s revenue growth is already showing signs of leveling off. Revenue grew 29 percent sequentially in the fourth quarter of 2016. That’s impressive, but you would expect really rapid growth in the fourth quarter, when ad spending is concentrated due to the Christmas shopping season. And it represents a sharp slowdown in the growth rate. Between the second and third quarters, revenue grew 77 percent.

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The company acknowledges that the IPO could ultimately be a zero-sum game—a deviation, to be fair, from Trumpian promises of greatness. The prospectus notes that those who invest on the assumption that doing so will be profitable might be disappointed: “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.”

There’s one last thing Snapchat and Trump may have in common: In the prospectus, Snapchat notes that in both 2015 and 2016, despite being worth billions of dollars, it didn’t pay a cent of income tax.

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