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Rocky road show

Snapchat is having a hard time convincing investors it's worth $22 billion

Snapchat is having a hard time convincing investors it’s worth $22 billion

The parent company of Snapchat (Snap Inc.) is going public next week in one of the most closely watched tech IPOs since Twitter went public in 2013. The ephemeral messaging service that officially describes itself as a “camera company” is pulling for a market valuation of about $22 billion.

The potential trouble for Snap is that its most tangible source of revenue — automated ads — will have to siphon ad dollars from Google and Facebook, two companies that effectively enjoy a duopoly on the digital advertising market. Investors are particularly worried about Facebook, which has introduced competing features on WhatsApp and Instagram that could further stall Snapchat’s already slowing user growth.

Snap’s corporate leadership has been meeting with investors around the country as part of what’s billed as an “IPO road show” in order to allay concerns. Based on various news reports this week, the process seems to be pretty rocky.

For one thing, with less than two weeks to go before the public offering, top Snap ad executive (and therefore one of its key business leaders) and Facebook alum Sriram Krishnan announced he is leaving the company. Business Insider, which spoke with investors at Snap’s New York road-show stop, reports that a number of those present felt they didn’t get straight answers from Snap’s executives during the “respectful but somewhat skeptical” meeting.

Their grievances are said to include two big things:

  • That Snap failed to give a real justification for why shares in the company won’t have any voting rights (which is highly unusual)
  • Lingering doubt about Snap’s ability to grow its user base substantially in the long run, as Snap user growth has slowed significantly in recent quarters.

Goldman Sachs, one of the banks arranging the IPO (meaning it will make good money on fees if the offering goes according to plan), reportedly estimates that Snap’s daily average user count will grow by about 41 percent, from 158 million to 221 million by 2018; for comparison, Facebook’s user base was around 845 million at the time of its public offering.

Bloomberg, which also reported wishy-washy vibes from the road show, quoted an investor at the New York meeting who described Snap as placing part of the blame on Android for its growth issues, and in general having “sort of danced around the issues with user growth.”

Evan Spiegel, the 26-year-old founder and CEO of Snap, has long maintained that user growth isn’t everything. What makes Snap valuable, he and Snap leaders insist, is that it has a lot of really young users who spend an inordinate amount of time on Snapchat every day.

Snap and other tech startups generally get some room to “dance around” investor and public skepticism before they go public, or at least until they need to raise another round of funding. Sometimes, a so-so IPO can even give way to powerful, once-in-a-generation business, as in the case of Facebook.

But for this tech darling, which has Wall Street breathing down its neck to figure out whether it is the next Facebook or, worse, the next Twitter, the dance floor might not be all that big to begin with.

Cover: (REUTERS/Lucas Jackson)

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