Why Snapchat's only way is an IPO and why it will (eventually) fail

Snapchat, claiming to be worth $25B, where no one knows how many active users it really has, is going public. Probably serving as the only way the company can actually can make money for its founders and early investors - there is no exit opportunity for the company at the valuation it is setting for the IPO.

Benchmarks - only Facebook and WhatsApp

A company going public - Facebook went public in May 2012 worth $104B - but it had 845M monthly active users. But Facebook already had $1B of quarterly revenue. Snapchat has a tiny fraction of that (maybe $50 - 100M, but noone knows).

We could also compare WhatsApp, which cost Facebook quite a buck to acquire. But WhatsApp we can still argue is now several times more valuable than Snapchat, with over 1B monthly active users - was worth $22B.

So what could justify Snapchat's huge valuation? Definitely not openness, transparency, and a direct approach to the market.

Snapchat and transparent? No thank you!

Go ahead and look through any public records and you will not be able to find a single official document talking about Snapchat's either revenues or monthly active users. It has also filed for an IPO confidentially, which companies under $1B in revenue can do. There are no information on any of Snapchats figures.

Back in November 2015 Fidelity marked down its then recent investment into Snapchat by 25%.

Fierce competition from Instagram, Facebook, and Messenger apps

Snapchat did some good things - it has taught us a new, vertical video and photo format. It also became the go-to-cool social platform for youngsters - and still to a large extent is.

And then Instagram launched Stories. Facebook also launched Stories in Messenger - and you will see that very soon, Facebook will launch more me too functionality in the area.

Spectacles to the rescue?

But maybe electronics products are something Snapchat can go after and win big. Snap Inc. could claim: "Actually, we are a fashion camera company doing electronics, and we will incorporate little cameras everywhere." - while that could be the case, it exclusively publishing into the Snapchat application means the app would have to remain very, very cool.

Snapchat - downloads still doing great

One thing is clear - people still download Snapchat and Snapchat is able to create amazing buzz. Clearly, their app store rankings is doing well - flat in some markets YoY (which is good to keep such a high position), some markets already showing a small dip.

The question is - even if downloads are great, what is the app engagement like? Do the people that download it really go ahead and use it, or is it just prolonged craze - I have to have Snapchat - but people don't actually use it or get it. I have 830 users on Snapchat and 5 of them have published stories - this number is 55 on Instagram Stories.

Main app - Slow user activity death?

When I always watch trends, I go around and ask influencers and celebrities on the platforms - Influencers on Snapchat are reporting numbers falling to 50% of original values in Europe. Instagram has a much bigger base to convert into stories. Time will tell - but with Facebook matching the functionalities and showing better scale, we will see where it all gets.

Snapchat Media app - a chance for the future?

The place Snapchat could claim a lot of work is on the publishers side - it could say this is now how people want to consume news, and take a bite even out of Twitter in its real-time way of doing things. Basically, Snapchat would curate and create news, while news organisations would start producing in this format. Snapchat could claim this is the lifestyle way of consuming news around you, and in case they get to a certain scale, they could make it.

Why go public? It's the only way.

At this point, Snapchat serves as a great free innovation hub for Facebook, where Facebook can just take anything it likes, test it, and scale it. Facebook even admitted the great inspiration it has in Snapchat, so Facebook is not likely to buy it.

Any likely exit now would be a down round from original investors valuations, and its quite obvious the company won't raise more money in a traditional way - which means the only way for founders to get rid of those investor preferences and convert is via an IPO, and make it look all shiny. They could even go public and later exit without those preferences marking that it was the only way.

At this point, you have to think - Snapchat better get a lot of lipstick out.