Weekly Update #168: What would a 2017 Snapchat IPO Look Like?

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Hello Investors,

Could we see a SnapChat IPO in 2017?

Last week, rumors circulated that Snapchat, the ephemeral messaging service, was gearing up for a 2017 IPO. The valuation discussed was $25 billion, which would make it the largest venture-backed tech IPO since Alibaba, and the largest US IPO since Facebook.

The company is said to have 2016 revenue in the ballpark of $250-$350M, according to the article, and 2017 revenues of $1B or more. The average multiple on 2016 revenue (a common metric for comparing tech companies) for publicly traded stocks is at 6.2x, according to the Bessemer Cloud Index. So why on earth would investors be willing to pay an 83x multiple on Snapchat's revenue (assuming $300M in 2016)? 

In a word, growth.


Source: TechCrunch

It's almost unheard of to see a company grow 9-figure revenue by more than 100%. If Snapchat can realistically deliver on its $1B revenue goal in 2017, equating to 233% revenue growth, then investors will be willing to wait as Snapchat "grows into" its multiple. A company valued at $25B with $300M in revenues is trading at an 83x multiple; with $1B in revenues it's now trading at a 25x multiple. While that's more digestible, it still would put Snapchat on the very very high end of tech company multiples.

I have no crystal ball, but given the fact that Snapchat probably has plenty of cash in the bank (they raised $1.8B in May 2016), why rush the IPO? Why not get closer to that $1B revenue target in 2017, and run some business experiments as a private company? Could you imagine how Wall Street analysts would have reacted to Snapchat's $130 "Spectacles" move?

In other news...

Phil Haslett | Founder + Head of Investments | EquityZen 
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