The social media platform that’s become the all the rage among young people is making its big stock-market splash through its Snapchat IPO (also known as the Snap IPO).
IPOs are a monumental moment in a company’s history because suddenly, anyone, anywhere can purchase stock in the company through a broker.
An IPO marks the first time equity or shares are opened to the general public. While companies often raise capital by issuing debt or equity from other private sources, an IPO opens them up to a much broader audience of potential investors.
A whole new world
When a company goes public, it enters the major leagues of companies and is subjected to much stricter rules and regulations. Having thousands upon thousands of shareholders means that you’re constantly under the microscope from investors and government agencies alike. A publicly traded company is bound by the federal government’s rules to report its financial information every quarter, and it must appoint a board of directors.
Going public also means that investors can freely purchase and sell stock in the company, making an investment in the company extremely liquid. If a company’s stock is in high demand, they can issue more stock, opening the spigot for more capital for the company.
Beyond selling stock, public companies also have cheaper access to debt markets because they’re mandated by the government to be fully transparent about their finances, something that banks like very much.
Snapchat has grown from a tiny startup into a social-media giant in just a few years. The first time the app caught investors’ attention is when the founder, Evan Spiegel, turned down an offer from Facebook to purchase the app for a whopping $3 billion in 2013.
Today, Snapchat has almost 160 million users, and is one of the most used apps in the United States. As the company prepares for its IPO, it’s setting it’s valuation at $24 billion dollars or at $17 a share. As a comparison, that’s approximately the GDP of Jamaica.
Yes, $24 billion is a pretty insane number, but Snapchat is considered a powerhouse in the social media world. For now, parent company Snap Inc. must convince investors that they’re not a passing fad, and that an investment in their company is a worthwhile venture.
A $24 billion valuation might be hard for some investors to swallow because Snapchat doesn’t really have a sustainable revenue model yet. In fact, while they’re taking in more money every year, last year they lost more than half a billion dollars. The app’s parent company, Snap, has even warned that it “may never achieve or maintain profitability.”
Snapchat has just started to figure out how it’s going to make money. Its monetization model is a mix of selling geofilters, selling content space to media outlets and direct-to-consumer advertisements that really don’t exist yet.
Takeaway: Welcome to our crazy world
If you’re scratching your head, you’re not alone. Snapchat has no proven plan to make money, yet they’re touting themselves as a company that’s worth billions upon billions of dollars. Surprisingly, thousands of investors will likely jump at the opportunity to invest in this growing company.
This is our new normal for tech companies, as investors aren’t really concerned that companies such as Uber, Twitter and Snapchat aren’t making any money yet. Many of these companies continue to bleed money, and investors are waiting patiently for a path to sustainable business practices.
But don’t be fooled because these companies will eventually have to make money or perish. After all, that’s why these companies exist in the first place.
Maybe it’s time to remind these folks that they’re in the business of turning a profit for shareholders, or they might eventually disappear just like your Snaps.
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