Taking Stock of Snap Ahead of Its IPO

Snap’s IPO in March is one of the most highly anticipated public market debuts in some time. Much of the anticipation comes from the questions surrounding Snap: Is it really worth $25 billion? Can it reach its rumored $1 billion revenue target in 2017 after generating $350 million in 2016? Can it avoid investor comparisons to Facebook, which went public at a $4 billion revenue run rate? Can it continue to stay authentic once it needs to appease shareholders? Will Facebook’s copycat strategy hurt Snap in the long term?

While we wait for these answers to unfold, I wanted to take stock of what Snap has achieved to date and what I expect it to achieve following its IPO.

Pre-IPO

Snapchat has become the messaging app for mobile-native millennials and Gen-Z.

Better than any other app, Snapchat has captured millennials and Gen-Z. There are several reasons for this. For one, it’s a mobile-native app. You can’t send a snap on desktop and these generations have little interest in doing that since the smartphone is their primary computing device (one out of five millennials don’t even use a desktop). Millennials are also overindexed on social media, and now crave privacy and the sense of a one-on-one connection. Messaging apps have risen in popularity and even overtaken social networks in usage, and Snapchat is riding (or even driving) that wave — 70 percent of its user base is millennials.

Snapchat also speaks the language of Gen-Y/Gen-Z, which is visual communication. This growing, tech-savvy youthful demographic communicates with text, but it’s frequently accompanied by emojis and GIFs and hashtags. Snapchat fuels that expression. Finally, Snapchat’s native-swiping navigation is a UI that is intuitive to millennials/Gen-Z but not to parents, which has prevented it from becoming overrun by older generations as Facebook was. When there are entire guides about the hidden Easter eggs within Snapchat’s UI, you know there is a higher barrier to entry. Finally, in terms of prosumption, these consumers have interacted with Snapchat ads in a way never before seen (more on this in the next point).

Snapchat offers a unique vehicle for brand engagement.

While ephemeral content doesn’t seem conducive to brand engagement, the opposite is true. The format creates authentic, immediate content shared on the fly that forces you to pay attention. Contrast that to Facebook or Instagram where that same sense of urgency isn’t there — you can always can come back later without fear of missing anything.

Snapchat's sponsored Xmen: Age of Apocalypse filters, promoted by 20th Century Fox in advance of the movie's release in 2016

Snapchat's sponsored Xmen: Age of Apocalypse filters, promoted by 20th Century Fox in advance of the movie's release in 2016

 

For brand engagement, we’ve seen Snapchat is ideally suited for teaser content, whether it’s a photo that lasts 5-7 seconds or a 10-second video. But sponsored geo-filters and face lenses have introduced new compelling ad units that have become premium inventory — geo-filtered masks on a prime weekend are reported to run as much as $500,000 per day.

 

Snap is more than a one-trick pony.

Snap has done a remarkable job of innovating its core product — Snapchat Stories, geo-filters, lenses are all great additions (we know Facebook agrees). But when this software company unexpectedly jumped into hardware, it was a bold bet that showed it’s not afraid to take risks and is more than capable of bringing new products to market and generating buzz. (Indeed, if we learned anything from Spectacles, it’s that Snap is made up of master marketers.)

The Google Glass flameout left most companies wary to venture into smart glasses, but Snap seems to have learned the right lessons from where Glass went wrong. For one, the price point for Spectacles is much more affordable ($129 vs. $1,500 for Glass). Spectacles also look like a pair of Ray-Bans and have a sense of style. They’re modeled by fashion models and cool kids, not awkwardly rolled out at a Diane Von Furstenberg fashion show and worn by Silicon Valley tech journalists.

The iconic photo of Google Glass

The iconic photo of Google Glass

Spectacles’ product shots are worthy of a fashion magazine    

Spectacles’ product shots are worthy of a fashion magazine

 

Privacy became a lightning rod for Glass, and Snap smartly addressed these concerns by ensuring Spectacles light up when they’re recording so people know when they are being filmed. (People hated that they couldn’t tell the same on the receiving end of Glass.) But most importantly, Spectacles have a clear, definitive purpose: They take a 10-second video and post it to your Snapchat account. That’s it. Nobody knew exactly what to do with the footage from Glass, which led to its early demise.

 

Snapchat has created something worthy of imitation.

 

In August 2016, Facebook announced Instagram Stories, a direct copy of Snapchat Stories down to the name. Instagram CEO Kevin Systrom admitted as much in an interview. While certainly not inspiring from an innovation standpoint, the strategy was successful — Instagram cracked 100 million daily active users for Stories shortly after the launch (and now has hit 150 million — the same as Snapchat overall). After failed attempts to clone Snapchat (remember Poke and Slingshot?), Facebook finally found how it could replicate Snapchat’s success.

 

Since then, Snap has watched Facebook clone its signature features across the social network’s family of products. In October, Facebook tested ephemeral messaging of videos and photos in limited geographies and introduced Facebook Live “masks,” leveraging technology from MSQRD, the Russian startup it acquired in March 2016. In December, we found out Facebook is working on “Collections” featuring aggregated content from publishers, much like Snapchat’s “Discover” portal.

 

While Facebook has a clear scale advantage (1.1 billion DAUs; WhatsApp and Messenger have 1 billion MAUs and Instagram has 600 MAUs), Snapchat has a couple of advantages compared to Instagram: It feels more authentic, it demands your attention and it’s better for private messaging. Snapchat creates an empathetic link between the broadcaster and the audience because it’s not doctored or as heavily filtered as Instagram. Instagram is a great place to go and consume content, especially professionally shot, beautiful photos, but people aren’t on Instagram Stories every day...yet.

 

That being said, Facebook is going to continue to be a threat to Snap. The company just hired the head of video personalization from Netflix, so there’s no doubt that video will continue to be a big focus for the company as it attempts a hostile takeover on Snap’s territory in mobile video.

 

Post-IPO

Snap has global ambitions.

By announcing it is making Soho, London its international HQ, Snap is purposefully situating itself in an advertising and creative hub. It also allows the company to stay connected to its growing user base globally (it has 50 million DAUs in Europe, and 10 million of those are in the U.K.). Snap also opened a R&D office in Shenzhen, China with 20 employees, signaling we can expect more international expansion in China and beyond.

 

Snap’s positioning as a “camera” company hints at its roadmap.

Snap has already showed its hardware chops with Spectacles. As an investor in VR/AR, I’m most intrigued by Snap’s potential foray into augmented reality. Snapchat’s default of opening the app on the camera is genius — it means you see the world through Snapchat. In the future, imagine all the brand interactions that become possible with augmented reality and computer vision applications if Snapchat experiences the world in real time, alongside you. The acquisitions of tech companies such as Seene, Looksery, Cimagine, and rumor has it, Prisma, will all apply computer vision insights into the platform.

We can also expect facial and object recognition to play a larger role. The most frequent way you add new friends is by taking a photo of their Snapcode; now imagine being able to better recognize who other people are in your snaps. (This is one instance where Snap would be following Facebook’s lead.)

Snap has also secured patents around acoustic fingerprinting and audio recognition. We could see Snapchat ask to hear what’s going on around you and use audio cues to push content to you, as well as perhaps monetizing licensed music used in professional snaps in the future. Snapchat already has a partnership with Shazam for voluntary music recognition. Eventually, after more of these one-off integrations, I think Snapchat will become a platform in the way Facebook was, enabling other companies to rise on top of it, just as Playdom (a company that Signia co-founded and sold to Disney) and Zynga did in gaming.

I also expect Snapchat to pursue third-party integrations for organizing nights out. Fandango, Yelp, Uber, etc. could let you plan a night out without having to leave the Snapchat messaging stream. It would also be useful to be able to get a live pulse of the venue you want to visit before you go check it out by seeing snaps from people already there.

While there is currently limited personalization in the app, I expect shortly we’ll see snaps from our “favorite friends” appearing first. Snap will need to tread carefully, however, as they don’t want to fall into the same bucket as Facebook where you’re in an echo-chamber of like-minded opinions all the time. Finally, on Discover, I expect more premium brands will load Snapchat-native content, cutting publishing deals with the platform.

While its flagship app initially gained notoriety for sending disappearing naughty pics, Snap has become a formidable force. As it prepares to go public, I’ll be watching (and snapping) intently. Follow my daily escapades @sunnydhillon25.

Sunny Dhillon is a partner at Signia Ventures, an early stage VC fund in San Francisco. He was previously a corporate strategist at Warner Bros in LA, the first business development employee at a VC-backed spin-off of New Line Cinema, and a former entrepreneur, having launched one of the App Store's first social-local-mobile apps (named BarStool) in 2011. Follow him on Linkedin and on Twitter (@SigniaVC).

 

Sandeep Dhillon