17 Mar What Startups Can Learn from Snapchat’s Great Coup
So, Snapchat’s IPO is a big story in the technology world right now. The IPO started at a value of US$17 per share, with stocks closing at US$24.48 last Thursday, a whopping 44 percent increase, making the company’s value US$28.3 billion.
Though tech stock prices post-IPO can be volatile as shown by Twitter, which is trading at 40 percent lower than its IPO price, it is evident that Snap has done well for itself on day one and has pulled something of a coup here. Let me elaborate on the coup part:
Snap’s great coup
Snap was a complicated company to decide on. With overt dependence on other tech giants through contractual commitments, huge burn rates, widening net loss figures, and the volatile nature of the advertising industry, here were the major concerns that plagued investors:
1. Existing social media sites have the muscle and the necessary offerings to clone Snap’s important features. The recent launch of WhatsApp Status and Instagram Stories, for example, saw Snapchat’s growth in DAU slow down.. Also, the notion that individual content producers find the reach of Instagram to be better is a major concern. Scott Galloway, a marketing professor at NYU, puts it into perspective: “Mark Zuckerberg wakes up in the morning thinking about Snapchat and goes to sleep thinking about Snapchat. Facebook is so clearly going after them.”
2. Snap is not popular in emerging economies. Apart from its competitor, Snow, which is quickly establishing itself in Asian markets, the fact that pictures, videos, and the app itself consume a lot of data might be a factor impeding its growth. These markets can boost the growth of a social media company as proven by Facebook and WhatsApp.
3. Snap’s investors (public) do not have any voting rights and by the company’s own admission, “no other company has completed an initial public offering of non-voting stock on the US stock exchange.” Though founders retaining a controlling stake in the company is not new, this is one of the first’s where shareholders (even as a group) have no say in running the company. Even if one of the co-founders leave, they would still have their say in decision making.
4. There is something nagging about the product itself. I have tried using Snapchat quite a few times but I doubt I will go back to it. For one, there was no network effect. But one of the larger issues for me was that I just couldn’t wrap my hands around the product and user interface. I thought it was a one-off thing, but I came across this line on The Economist: “The app makes little effort to help new users understand its appeal (a built-in user guide is buried deep within the app).”
But what went right for Snap?
How did it manage to ride a successful IPO when investors were being cautious about internet businesses and despite Twitter releasing its disappointing quarterly earning reports 20 days ago?
Apart from the positive macroeconomic conditions and dearth in tech IPOs since Alibaba in 2014, Snap planned on a beautiful strategy and executed it perfectly. After tracking the company closely, here are a few points that I believe we can learn from it:
1. Build a big picture
“We are a social networking app with our USP being disappearing of photos (by the way, people usually like to store them). We are targeting a user group which is not particularly known for having brand loyalty. Oh, we have a US$400 billion giant tugging at our user base and cloning our features.”
“We aim to reinvent the camera, a device that has been around for centuries and is now an integral part of every smartphone, that same device which has given rise to several billion-dollar companies. Our camera application clicks around 2.5 billion snaps every day which is roughly around one-third of the world’s population. Oh, the latest device is also wearable.”
Agreed. I exaggerated there. But in my defence, the first line is what the founders say. The rest reflect the thought process of investors on listening to that.
Snap has consistently referred to itself as a camera company mentioning that they believe “reinventing the camera represents our greatest opportunity to improve the way that people live and communicate.” When you meet people who have to bet their money on you, it is better to sell them on what you could be than what you are. It shows that the founder has a vision going forward and also the kind of market opportunities they can use to achieve big returns.
2. Branding is analog
Snap’s preparation to its IPO began with its release of spectacles. It brought its fans out onto the streets and created a treasure hunt equivalent with some writers calling it the best marketing campaign in history. The kind of frenzy and buzz it created made investors take note of the company and follow it keenly. In simple terms, it had created a brand for itself.
Branding is a continuous activity. Too often, startups use it solely for customer acquisition and later focus on channels which they think yield maximum returns. If you are running a startup, have some hacks that will make people talk about your offering in their circles. It need not always be an expensive affair. Right from a quirky visiting card to creating engaging content, live and grow your brand.
3. Create FOMO among investors
Snap was the first social networking company to reach London and meet European investors. They released an amazing video which talked about its philospohy, beginnings, culture, and the future. Throwing in information like “60 percent of the 158 million users create content everyday,” “users open apps 18 times per day on average,” and “users spend 25 to 30 minutes in the app every day” make an investor think about the kind of upside to the investment and push their own doubts to a corner (if-someone’s-coming-back-to-the-app-18-times-these-guys-are-doing-something-right kind of feeling). The recommendation from marketing executives from Universal Studios adds to the credibility and showcases the revenue opportunity.
Most of the time, entrepreneurs let investors dictate the terms of the conversation. However, a founder owes it to his business and team to get the best possible value from investors. Reaching out to a large group of investors can help you refine your fundraising strategy, communicate your business model effectively, and create a positive vibe in general. These meetings might not translate into investments but they may help in building your company’s presence and show that the team is willing to take questions and challenges head-on.
4. Bet on your core audience
Eighty-five percent of Snapchat’s 158 million daily users are between the ages of 18 and 34. One of the important points investors saw was that the younger generation doesn’t watch much TV, is paying for OTT content, are tech-savvy enough to install ad blockers, and hence, the only way to reach out to them via advertisements is through social media.
Despite naysayers, the company noted in its S-1 that it’s focused on boosting the monetization of its specific user base by sparking more engagement, not by courting older users. And yes, to support that fact, Snap had a seven-fold increase in revenue in a year. Add to this the facts that worldwide advertising spend will grow by 18 percent from US$652 billion in 2016 to US$767 billion in 2020 (Snap mentioned this statistic quite a few times on their S-1) and that millennial users tend to spend, and you have shown your investors how your core audience can bring in the market to your doorstep.
This teaches companies to bet on a demographic and ruthlessly optimize to suit your products to that one. Get your product market fit, identify who your customers are, and make them into loyalists while improving your offerings. Once you create loyalty, you can explore different groups more and increase your market presence. Snapchat has built an ecosystem around its offerings and has successfully showcased its plus points to investors.
What are your key takeaways from Snap’s IPO? Please share your views.
(Originally written for Tech In Asia, by Uday Marepalli.)