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Just because someone snaps their fingers, should investors pile in?
Keen-eyed prospective investors trawling through the prospectus for Snap Inc, the owner of Snapchat, will come across this on page 124: “Our team is kind, smart, and creative. 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.”
Eh? One wonders what the pernickety Wall Street lawyers who scrutinise every line of a prospectus to satisfy themselves of its veracity made of that. Did some poor sap have to wander Snap’s funky offices in Venice, southern California, with a carefully inserted speck of spinach?
One wonders, too, what prospective British institutional investors (rather a hardboiled, sceptical lot) will make of it. Evan Spiegel, Snap’s founder and chief executive, and his entourage of investment bankers will launch their roadshow today in London, hoping to persuade investors to pony up $2.1 billion in new money. If all goes well, Snap will float in New York in early March with a valuation of $21 billion or so and will join that club of listed tech wunderkinds such as Google, Facebook and Twitter that have transformed the way people live.
The teeth claim is in microcosm just the kind of thing that divides opinion. Some will take it at face value, as commendable evidence of a sincere attempt to keep the workforce happy in a fiercely competitive industry where talent counts for everything. Others are likely to see it as self-indulgent and pretentious twaddle that, well, sets the teeth on edge.
It’s not, however, unlike the prospectus of Google, in which co-founders Larry Page and Sergey Brin announced their philosophy of “Don’t Be Evil” and “Making The World A Better Place”. A lot of prospective shareholders in the 2004 IPO were equally bemused by the idealistic tone.
They needn’t have worried. Google shares were offered at $85. Now, renamed Alphabet, they trade at $847. Investors have made ten times their money, UK investors more because of sterling’s slide. A generous slice of idealism, or at least the appearance of it, certainly doesn’t preclude fabulous investor returns.
Sadly, the self-indulgence in the Snap prospectus goes a lot further than the faintly smug tone. Mr Spiegel wants investors’ cash but he doesn’t want them to have the slightest influence on how the company is run. The only shares being offered for sale carry no votes whatsoever. This is unheard of for any American IPO, and I can’t recall it happening in any UK flotation, either.
Not so long ago, investment purists were insisting that one share, one vote was the only way to structure an equity base. It was democratic, simple and prevented controlling families exercising a stultifying excess of power in the boardroom. Now, however, many thoughtful investors actually rather like the fact that founders have special vote-heavy shares. They can pursue long-term goals and are insulated from the quarterly earnings treadmill and the short-sightedness of the share market.
But shares that carry no votes at all is the ultimate in capitalist disenfranchisement. It’s a recipe for not being able to hold management to account in any circumstances. In Snap’s case, this is taken to extremes. Even if the founders leave, they will still control the company. Even when they die, their heirs will still control it for a further nine months.
And because Snap is categorised as an “emerging growth company”, it is also exempt from a string of checks and balances that might otherwise give investors reassurance, such as the requirement for external auditing of its internal controls. This, after all, is a company that in the same prospectus confesses to failings and “material weaknesses” in those very controls only two years ago.
Mr Spiegel, 26, and his co-founder Robert Murphy, 28, will control 89 per cent of the votes. They are asking for carte blanche with minimal oversight — this from an inexperienced pair who were barely in school when the technology bubble started to inflate and were still in short trousers when it burst.
Will they get the money? Probably. Grey market bets at IG on the likely market capitalisation of Snap at the end of the first day of dealings have it at more than $26 billion, is well beyond the top of the official pricing range. At that level, there will be rich pickings for the stags.
Investors mutter about the slowdown in user growth at Snap in recent months. Many have lurking at the back of their minds the outcome for Twitter, shares of which now languish 36 per cent below its 2013 float price.
Yet Snap does have a seductive story to tell. Revenues increased sixfold last year while costs only doubled. Extrapolate that kind of record a few years into the future and sizeable losses today soon turn into vast profits. In theory, Snap should be the perfect beneficiary of the seismic shift in advertising spend from television to mobile.
It is changing the way the young communicate, not any more by text alone but by its potent and addictive mix of self-destructing and manipulable videos, pictures, filters and emojis. Yes, Facebook is unassailable when it comes to many things, but for more informal, casual, chilled chatter, the young prefer Snapchat. Investors in the next few weeks have to decide whether this is a permanent change to the landscape or a fad.
Of course, whether Snap now bombs or booms, the serious money has already been made. I understand that venture capital investors who backed Snap in 2012 have made 50 times their money. One rare UK backer at that time was Wellcome Trust, Britain’s biggest charity and a phenomenally successful investor. It is set to make around $100 million in profit if the IPO goes as planned.
For the record, it is now starting to sell, not buy.