Venture Bytes #33 – Snap Out of It

Posted March 6, 2017

Snap Out of It?

Snap IPO roadshow has hit the home stretch and the speculative fever is building up. A lot rests on the company’s ability to leverage the influence of the Millennials. Though compelling, this demographic base comes with its own set of challenges. Can Snap harness, sustain and profit from this coveted group? That is a $64,000 question, ahead of the IPO.

The SnapChat app is being powered by Millennials who make up the majority of Snap’s user base (over 60% in the 18-34 age bracket). More broadly, Millennials are the largest generation in US history and as they reach their prime working and spending years, their impact on the economy is going to be huge. There are roughly 80 million millennials in the United States alone, and each year they include young adults in their 20s and 30s. While Millennials are already a potent force, they will truly come into their own by 2020, when their spending in the United States is expected to grow to $1.4 trillion annually and represent 30% of total retail sales and a sizable percentage of other markets as well. Furthermore, they are projected to become the single largest segment of the American workforce.

Millennials are highly engaged and that is a good thing. But there is a downside. This group tends to be very fickle, jumping on every “bright shiny object” as fast as they can make them. They are tethered to their smartphones, which means they are on top of what’s next, and anticipate upgrades and changes to technology – often comparing the latest innovations with colleagues, family, and friends. Who gets what and when is a badge of honor amongst millennials, and the clamor for the newest tech is very real. They are “digital natives”, the first generation to grow up literally attached to smart phones, tablets and laptops, with access to social media and the Internet, and the way they find, consume and act on all information – especially targeted advertising – is completely different from past generations. Millennials want more. They want it now, they want it newer and they want it faster than ever before. They consume and share content like crazy – but it has to be good – innovative, and cutting edge.

Can Snap harness and sustain this vibrant user group? The answer is not very obvious given its recent reported metrics. User growth slowed in the second half of 2016 as competitors – particularly Instagram – began to offer similar features and experience. It is still early to judge the effectiveness of the company’s monetization strategy, but early indications suggest a slow start. The revenue per user (ARPU) differential between Snap and Facebook is a glaring 10x. And global expansion beyond its existing markets in North America, Europe and the U.K. – along with the ability to monetize it successfully – may be limited by the low penetration of high bandwidth cellular networks in those countries and weak mobile advertising markets. Another limiting factor for growth could be that the majority of user engagement on Snap is on smartphones with iOS operating systems and the company has prioritized future development to products that operate with iOS operating systems rather than smartphones with Android operating systems, the dominant operating system in the majority of the world.

Against this backdrop, valuing the company at $19.6 to $22.4 billion – the expected IPO valuation range – demands a high level of confidence in the company’s ability to meet, if not exceed, expectations. The social media landscape is littered with very popular sites that either failed to develop a sustainable business model or are hitting the upper limits of the monetization potential. The biggest challenge for Snap is to maintain its differentiated appeal, broaden the platform to other “sticky” services and features, and keep refining its monetization engine. Twitter’s troubles with user growth stagnation, monetization challenges, and investor impatience should be a forewarning for potential Snap investors.

A Culture of Smoke & Mirrors

The first thing that comes to mind for many people when one mentions the tech industry and tech startups, is a friendly and supportive culture. Recently however, this perception has increasingly been called into question as reports of a culture of systemic sexual harassment at Uber have risen into the spotlight. Susan Fowler, a former engineer at Uber – now at Stripe, authored a blog post describing a culture of discrimination and incidents of sexual harassment by managers at Uber, while the H.R. department failed to take action. Employees at other major Silicon Valley tech companies, both public and private companies, have since come out to surface claims of similar incidents at their workplaces, with managers fostering a culture that accepts the harassment, even hiring and promoting known propagators to C-suite positions.

As these allegations are surfacing, many employees believe that these incidents of sexual harassment are emanating as secondary effects of the broader Silicon Valley attitudes of being aggressive in business, skirting and bending the rules, and being determined to hire the best – regardless of what baggage they might bring with them. Uber-like success in the world of startups is a rare phenomenon, leading to a bold and egotistical environment perhaps encapsulated best in a 2014 GQ article where Travis Kalanick, Uber’s CEO, referred to Uber as “Boob-er”, referencing how the company’s success has helped him attract more women.

The harassment has also been credited as a byproduct of the decentralized leadership that has become prevalent in many successful tech companies. Uber in particular has focused on maintaining a decentralized stricter where it gives tremendous autonomy to its regional offices, resulting in General Managers wielding a great degree of power as to the company’s operations at the local level with a sole focus on hitting growth and revenue targets. With this focus, companies have been focused on on-boarding the top talent that would enable the company to achieve the greatest growth possible – even if that talent has a checkered past. As described in a TechCrunch article following Ms. Fowler’s post, several tech employees have come out with instances where their companies hired a candidate who had a known track record of sexual harassment and was even dismissed from their last company for that same reason, and continued to commit sexual harassment after their hiring. In another instance, a senior executive who was a known repeat offender at the company, was deemed to have too great a “technical breadth” of knowledge, that the company would never take action against him and fire him.

As tech companies continue to grow in scale, there needs to be a culture shift in the industry. From these incidents of sexual harassment to Theranos’ downfall, Hampton Creek’s inflated sales, Lending Club’s fraudulent loans and beyond, it is clear that Silicon Valley can no longer hide behind a smoke and mirrors perception of a lean and disruptive culture, and rather needs to begin to focus on honesty and character – two key traits that aren’t found on an income statement or a graph with growth metrics.