Snapchat CEO Sends Message to Market on IPO

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Snapchat CEO Sends Message to Market on IPO
Rounded: GumGum CEO Ophir Tanz.

Snapchat has an exit plan, the question is just whether investors will get in on the way up or the way down.

“We need to IPO, we have a plan to do that,” Evan Spiegel, Snapchat’s chief executive, said at Re/code’s Code Conference in Rancho Palos Verdes last week. “An IPO is really important.”

But timing is everything, and Spiegel conceded in practically the same breath that he is watching the market carefully, hoping to mitigate what he said was a coming downturn caused by overinflated equity prices.

“When you have near-zero interest rates, or negative rates in some countries, and governments have printed a lot of money, I think that people are making riskier investments and there will be a correction,” he said. “We don’t know when, but it’s definitely something we’ve factored into our plans.”

Going public at the top of the market would likely alienate both institutional and individual shareholders looking for upside, but waiting until after a correction risks reducing the valuation for early investors.

However, outside venture capitalists said raising the prospect of a bubble is acknowledging a reality that Snapchat appears to be well-positioned to overcome.

“Bubble or not, he knows, ‘I have enough people who want in,’” said Peter Lee, managing partner of Beverly Hills’ Baroda Ventures. As far as responding to the bubble question: “He probably answered less under the guise of what’s best for Snapchat and more of what’s going on in the market.”

The prospect of a bubble is just one factor of many that Venice’s Snapchat will have to consider before going public.

“There’s always this game theory around IPOs: Who else is going out? Are we stronger or are we weaker than others? Is the sector in favor or is it not in favor?” said Chirag Chotalia, vice president in the Westwood office of Chicago’s Pritzker Group Venture Capital. “There’s a lot of things that are detached from the underlying value of the business that determines whether something IPOs.”

Still, many prospective retail investors, wary of being burned by another overheated tech IPO, might want assurances when they read four-year-old, unprofitable Snapchat is seeking a $19 billion valuation from private investors. Spiegel’s bubble talk might be, in part, an effort to explain that value.

“I think he’s starting to help people understand the model,” said Chotalia. “You’re trying to inform the broader market and the buyers of your future stock.”

When it comes to the company’s core value, advertising, Snapchat is “much more interested in increasing engagement than getting big,” Spiegel said.

With engagement as its focus, the company has seen fit to charge high advertising rates for its content. Ad rates on Snapchat’s Discover feature, a collection of daily video channels for publishers such as CNN, National Geographic and ESPN, were reportedly as high as $100 per thousand video views at launch in January. They have since fallen to $20 per thousand views, indicating the company might have overreached, but are still much higher than the average $7.60 per thousand views that YouTube charged in 2014, according to video advertising software company TubeMogul.

To broaden its appeal, Snapchat is also looking at removing a requirement that users hold a finger on their mobile phone screens to see videos and pictures.

For example, easier viewing of Snapchat’s Stories, a section of the app featuring streaming pictures and videos from events such as music festivals and sporting events, might engage a larger audience.

If that happened, the company’s two most valuable assets to advertisers, Discover and Stories, would look a lot more like TV content. And that’s something future retail investors could understand.

Series C for Ad Service

GumGum, a company that overlays digital images with advertisements, has raised a $26 million Series C investment round and said it could be ready for an IPO by 2017.

The round was led by Morgan Stanley with participation from New Enterprise Associates, Upfront Ventures and First Round Capital. It valued the Santa Monica company at $200 million.

GumGum’s image recognition technology combs through a network of websites that subscribe to the service, identifies the contents of pictures on those sites and a utomatically overlays related ads. It can be used, for example, to find a vehicle in an image and sell an advertisement to a carmaker that will pop up when a viewer cursors over the image. Advertisers pay for a set number of impressions, and GumGum takes a slice of each contract.

“We can actually tell the make and model in the image,” said Chief Executive Ophir Tanz. “You might have Chevy buying images of the Camaro across the platform.”

GumGum has raised almost $37 million in venture capital investments and has grown to 115 employees. Tanz said its revenue run rate in the first quarter puts it on track to generate $75 million in 2015.

With accelerating revenues, a $200 million valuation and an investor like Morgan Stanley, an IPO by 2017 is possible.

“We are not completely married to it,” Tanz said, adding “our perspective is we will be a viable IPO candidate because our revenue and our story will be ready as early as next year.”

Staff reporter Garrett Reim can be reached at [email protected] or (323) 549-5225 ext. 232.

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