Anwsering two questions based on the article. Each question no more than 400 wordsQ6. Is this a good time for an IPO?Q6. Is this a good time for an IPO?Q6. Is this a good time for an IPO?Is this a...

Anwsering two questions based on the article. Each question no more than 400 words





R E V : M A R C H 8 , 2 0 1 8 Professor Marco Di Maggio prepared this case with the assistance of Josue Gil Deza. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2018 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. M A R C O D I M A G G I O Snap Inc.’s IPO (A) On March 1, 2017, Wall Street investors focused their attention on Snap Inc. (Snap). The California- based entity, self-described as a camera company,1 planned to make its debut on the New York Stock Exchange (NYSE) the followings day in a highly anticipated initial public offering (IPO). Launched in 2011, by Evan Spiegel and Robert Murphy, Snap began as an appa that enabled users to share self- deleting pictures. The app, later named Snapchat, grew rapidly over the next five and a half years, acquiring more than 158 million daily active users (DAU).b,2 By 2017, the company aimed to become a major player in the mobile advertising segment. Prior to its IPO, Snap raised more than $2.6 billion in private funding, fetching valuations in excess of $20 billion.3 With a market hungry for large tech IPOs, investors hoped that Snap’s IPO would initiate a trend among large tech companies looking to issue equity in 2017. Snap planned to sell up to 230 million shares,c or 19.6% of the company. The market initially speculated that Snap would look for a valuation upwards of $25 billion.4 Snap surprised the markets, pricing its IPO at $17 per share—a valuation of $23.6 billion.5 Although higher than the $14 to $16 range outlined in early SEC filings, some industry observers thought that Snap priced the IPO conservatively to attract investors potentially “squeamish over too rich a price.”6 Others pointed out that the IPO was likely oversubscribed, and that the company was issuing shares at essentially the same valuation as its last funding round.7 Did these signs indicate that Snap’s share price would jump before trading even commenced? Other investors remained skeptical, believing that the price was too high for a company that posted losses of $515 million in 2016.8 In addition, the company continued to burn cash, generating a negative operating cash flow of $611 million during the same reporting period.9 Competitors included Facebook-owned Instagram, which had duplicated several of Snapchat’s core functions, and was close to catching up in terms of users. Beyond competition, investors also voiced concerns with Snap’s a “App” an abbreviation often used to describe a software program used on computer or phone operating systems. b Snap defined a Daily Active User as “a registered Snapchat user who opens the Snapchat application at least once during a 24- hour period. We measure average Daily Active Users for a particular quarter by calculating the average Daily Active Users for the entire quarter.” Source: Snap, Inc., February 2, 2017 Form S-1 (filed February 2, 2017), https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm, accessed November 2017. c This number included 200 million shares, plus a greenshoe provision for an additional 30 million shares. Altogether, the total would be made up of about 160 million newly-issued shares, and 70 million from existing stockholders. 2 unprecedented decision to issue shares with no voting power whatsoever, allowing Spiegel and Murphy to tightly control the business as it tackled the challenges ahead.10 Under these circumstances, investors continued to wonder, would Snap’s share price jump? Initial Public Offerings11 An initial public offering, also referred to as going public, was the process through which a privately-held company sold its equity shares to the public for the first time. The shares were then traded in the public markets, or on a stock exchange. Companies usually went public to raise funds in a manner that helped both improve access to capital, and provided greater liquidity for shareholders.12 The IPO process could take several months to more than a year, and began with the selection of one or more investment banks to lead the process. These banks, known as the lead underwriters, worked closely with the issuing company as it fulfilled legal requirements, including registration with national regulators. In the U.S., this was the Securities and Exchange Commission (SEC).13 Underwriters also acted as the wholesalers for the shares being sold to the public. To facilitate this process, lead underwriters often created a larger syndicate of banks, distributing the responsibility of selling the shares across its members. The syndicate banks conducted visits to potential investors to promote the company and gauge investor demand. Commonly referred to as the road show, underwriters mainly targeted large institutional investors. Based on the expressions of interest from potential investors and the company’s valuation, the lead underwriters and the company determined a proper price for the shares, referred to as the IPO price. The IPO price often represented a discount from the expected share price achieved during the first day of trading.14 All of the shares being offered by the issuer were then bought by the underwriters, typically at a discount of 5% to 7% from the IPO price, and thereafter sold to the subscribing investors at the IPO price. The spread of 5% to 7% represented the investment banks’ commission, making an IPO an expensive proposition for the company. Investment banks also helped create a market for the shares by ensuring there was enough liquidity available at the start of trading. Snap’s History Evan Spiegel met Robert “Bobby” Murphy and Frank Reginald “Reggie” Brown IV at Stanford University.15 In 2010, Spiegel and Murphy launched Future Freshman LLC, a platform that aimed to help students and parents navigate the college admissions process.16 The venture failed to take off, but undeterred the trio launched, Picaboo, a messaging app in 2011, with Spiegel as the chief executive officer (CEO), Murphy as chief technology officer (CTO), and Brown as chief marketing officer (CMO).17 An iOS app, Picaboo allowed users to share self-deleting pictures, controlling how long the pictures would remain visible to the recipient. Brown reportedly came up with the idea of ephemeral pictures and the ghost logo.18 While Picaboo showed potential, it had only gained 127 active users by the end of summer 2011.19 Tensions soon began to develop among the founding team, particularly regarding the division of equity.20 Brown left the company in August 2011, later filing a lawsuit against Spiegel and Murphy. The case settled in 2014, with Snap paying $157.5 million to Brown.21 In fall 2011, upon discovery that a New Hampshire printing company utilized the name Picaboo, Murphy and Spiegel changed the app’s name to Snapchat, but continued to utilize the signature ghost logo.22 Snapchat grew exponentially, reaching 1,000 DAU by the end of 2011, and 100,000 DAU in 2012.23 3 Snapchat’s early success soon attracted investors, with Snapchat receiving a $485,000 investment from Lightspeed Venture Partners in May 2012.24 Spiegel decided to drop out of Stanford to focus on the project. Lightspeed’s investment allowed Snapchat to launch on Android and to add new features, including video support.25 Competitors began to take notice. Mark Zuckerberg, CEO of Facebook, reportedly met with Snapchat’s founding team in 2012. Shortly after the meeting, Facebook launched a very similar app, Poke.26 The increased competition failed to curtail Snapchat’s growth. In February 2013, Snapchat raised an additional $13.5 million in Series A financing, led by Benchmark Capital, giving the company a valuation between $60 and $70 million.27 Snapchat’s user base continued to grow, with users sharing 150 million images per day by April 2013.28 Without any developed revenue streams, questions over Snapchat’s long-term viability began to arise. However, Snapchat continued to attract investors, raising an additional $80 million in a Series B round at a valuation of $800 million in June 2013.29 This also coincided with a $20 million secondary offering, allowing Spiegel and Murphy to cash in on the venture’s early success.30 Total daily snaps, or self-deleting images, now reached 200 million.31 Snapchat again expanded its functionality, launching the Story function that same year, which allowed users to share a collection of videos and photos.32 Snapchat’s user base continued to rapidly increase, particularly among teenagers and young adults. By September 2013, 350 million photos were shared daily.33 Facebook reportedly tried to acquire Snapchat, offering nearly $3 billion in cash that November.34 Spiegel rejected the offer even though Snapchat remained unprofitable, still lacking any revenue sources.35 Instead, Snapchat raised an additional $50 million in a Series C round of funding, on a valuation of approximately $2 billion in December 2013.36 This funding coincided with the launch of a Smart Filter feature, giving Snapchat users the capability to indicate time and temperature, as well as other variables, and the introduction of the ability to replay snaps.37 In late 2013, security concerns around the app began to arise. Snapchat suffered a hack that exposed 4.6 million usernames and numbers in December 2013.38 A few weeks later, researchers discovered vulnerabilities that would allow hackers to freeze phones by sending many snaps.39 Finally, Snapchat settled a lawsuit brought by the Federal Trade Commission (FTC), in which it was alleged that Snapchat had deceived users regarding the permanent deletion of photos and videos, since media could be saved using third-party applications without the sender’s knowledge.40 In early 2014, Snapchat surpassed 50 million DAU. That June, Snapchat launched Our Story, which allowed users to add their snaps to an events story, in addition to adding the snaps to the users personal story. For the first time, anyone attending or associated with an event could add snaps directly to the event’s stream.41 In November 2014, Snapchat introduced ads, and the first sponsored Our Story collaborative live stream feature launched. Samsung paid an undisclosed amount to include Samsung pictures and videos between the media uploaded by users attending the 2014 American Music Awards, the first demonstration of how Snapchat planned to monetize its platform.42 This excitement was translated into another funding round, raising $485 million from 23 investors in a Series D round, with valuation reports ranging from $10 billion to up to $20 billion.43 Snapchat began to look externally for additional capabilities. It purchased Vergence Labs in March 2015, a company that developed smart glasses (called Epiphany Eyewear by Vergence), which were camera glasses that could record video.44 It also acquired AddLive in May 2015 in order to power Snapchat’s video chat feature.45 Soon after, Snapchat launched text and video chat features.46 In 2015, Snapchat surpassed 100 million DAU and introduced features called Geofilters, Lenses and Discover, the latter being a channel guide serving media content alongside brand advertisements. Partners in the project included National Geographic, Yahoo News, and ESPN.47 Snapchat also 4 reportedly raised $200 million in early 2015, at a valuation of $16 billion.48 Snap again used the proceeds to upgrade the app, adding: Geofilters, which gave users the ability to design and brand a “creative overlays” that told others where or what the user was doing; a Memories feature, which let users save their Snaps and Stories; and the integration of Bitmojis, or personalized cartoon avatars, after Snap acquired Bitstrips Inc. for approximately $100 million.49 In May 2016, the company closed a Series F round, raising a reported $1.8 billion at a valuation of approximately $20 billion.50 That September, Snapchat introduced Spectacles—video capturing sunglasses—its first hardware product. At the same time, Snapchat announced that the company would be rebranding and renaming itself as simply Snap Inc.51 According to Snap’s chief strategy officer, Imran Khan, “We rebranded our company to Snap Inc. because we are bigger than just one app . . . Snap Inc. is a camera company—we believe that reinventing the camera represents our greatest opportunity to improve the way people live and communicate.”52 For a timeline of Snap’s history and pre-IPO funding rounds, see Exhibit 1 and Exhibit 2. The Snap IPO53 In October 2016, rumors about a potential Snap IPO began to surface. Analysts indicated that the company looked to raise approximately $3 billion, and provided wide