Snap’s IPO basically ended where it started, which I view as a good thing. Overall, this IPO has many inside tech circles, from VCs to investment bankers to startups themselves, looking to it as a bellwether for future IPOs of companies of all sizes. Strategically, many IPOs of late have been priced low to start in order to have an initial bump and not drop below their opening price too quickly. This is a critical strategy for investor and company morale. Should a stock drop well below its IPO, as Facebook did, it creates a confidence drop in nearly everyone associated. I recall the panic from close friends who worked at Facebook at the time and were worried their big stockpile was not going to amount to much if Facebook’s potential was not as big as they all believed. Morale and sentiment around the stock matters, which is why it’s better to not have your IPO crumble and end below its opening price.
Conversations I’ve been having with many investors lately, both on the institutional side and with the VC community, have been around what it will take for public market investor expectations to normalize and not be wildly unrealistic. A message I’ve been trying to convey to those who will listen is the likes of Facebook may be the outlier when it comes to the new tech landscape. There are likely to be very few companies, maybe only Facebook, who touch two billion humans regularly. To believe that X company is the next Facebook may be completely unrealistic. Instead, we may need to embrace the idea of small to mid-cap tech company IPOs and be OK they are not hyper-growth stories. But that seems to be the root of the problem as shades of the dotcom era still resonate in people’s minds. We have done a decent job, at least, better than in the late 1990s, at valuing a company as they IPO but still a terrible job of truly understanding their upside. The point is, Facebook may be an anomaly so its unwise to use them as a comparable for an IPO.
There are a lot of healthy private tech companies who could have a successful IPO and continue to grow moderately. These companies are fearful of going public as they worry investor expectations will be too high. The result could be turmoil in the IPO which would dramatically hurt employee confidence and the ability to attract top talent to their company. This is the dilemma they are faced with when debating the right time to IPO.
Many I speak with are hopeful that Snap will be able to manage expectations in light of the slowing growth they are facing. The real test will be over the next few quarters when they likely show very little user growth but may show some advertising revenue growth. While not exactly the same comparison, many are watching Twitter in a similar vein. Twitter went public after their growth cycle ended but they are working to be creative and tell a story around business growth without necessarily having user growth. These are the kinds of narratives many are watching to see if investors remain patient or punish the stock based on how they set their expectations.
One of the more interesting dynamics of late for many tech companies, and specifically consumer ones, is not only how quickly they can grow but also how quickly they can hit their max total addressable market. This is quite deceiving because it creates the false appearance of a company in hyper-growth mode when, in reality, they are only hyper-growing for a year or two until they reach as many users as they are going to reach. I call this the easy growth, even though not all growth is easy. Once you hit your TAM, which you rarely know how big it is to start, growth gets really hard. Twitter, Snap. Inc, Netflix, Amazon, etc., are all in the tough growth stages where getting new users is not as easy as it once was. All this reality does for startups is make it hard to trust that their big growth booms are true reflections of the size of the market vs. just how quickly and easily it is to get a few hundred millions users nowadays because of how fast things travel with social media.
The reality is, markets may look larger than they really are for many companies and this changes the game on how you do the analysis to size your true potential. Given we help many startups and even big companies do this, I can say this skill is largely missing from many organizations since the rules of the game have changed — but many have not yet adapted.
Lots of challenges are ahead but there are also lots of opportunities.