4 Reasons Why Wall Street Will Underestimate Snap’s Longterm Potential
Snap, the Los Angeles based camera and video-messaging company, is set to IPO in two days and Wall Street is divided about Snap’s potential. The analysts are wondering if Snap will be the next Facebook or the next Twitter.
The answer is neither. It will be the next Snap!
Snap is a unique company. Just as all disruptors, it has to be considered on its own merits. It has several advantages that are likely to pave the way for its success in the long run.
I am not talking about how the stock will behave on the IPO or months after the IPO but how it will behave years from now. Here are the four most important reasons why Wall Street will underestimate Snap’s transformative potential. These reasons are related to Snap’s leadership, its recruiting advantage, its user demographics and its camera ecosystem nature.
Wall Street in notoriously bad at assessing disruptive companies at an early stage because the tools it uses to assess these companies are better suited for more steady companies. Hence many of the metrics and methods used by Wall Street will mis-account for these four important criteria that contribute to the success of a tech disruptor.
1. Perfect Leadership Dynamic
Every entrepreneur knows of a team’s importance for the success of a startup. The same is also true for a high growth tech company. Currently there are very few companies that have such a balanced founder team dynamic as Snap (maybe AirBnB is the other example). Analysts rarely consider this in their models.
a. Snap seems to have the perfect team constellation. The co-founders Evan Spiegel and Bobby Murphy have been close friends for years and have proven that they work well together. This trust and collaboration factor is very important in a team.
Evan, a highly creative leader and visionary product person, and Bobby, an equally brilliant technologist, comprise a perfect tech company leadership duo. Both of them have shown over the years that they can innovate and execute at a high pace.
b. The founders have an equal equity split between them, which means that both will care equally about the company’s future and will remain committed for the long run. This equal split is a psychologically important source of team stability and harmony. Several founding members of Facebook and Twitter moved on to start their own companies since they did not feel an equal amount of ownership.
c. To guide the young founding team in its early years as a public company, Snap also has a seasoned team of top executives, including Snap’s chairman Michael Lynton. Lynton has extensive experience and connections in the entertainment industry as the former CEO of Sony Entertainment.
2. Significant Recruiting Advantage
For a high growth company, recruiting and especially tech and creative recruiting is very important. Having a competitive advantage in recruiting is key to getting the best talent. Snap has several recruiting advantages that Wall Street could misunderstand.
a. Unlike all the other tech giants, Snap is in Los Angeles and not in the Bay Area. This means it can offer something to a top engineer or young college recruit that most other high-flying companies can’t. It can offer a different location.
Not every top engineer wants to live and work in the Bay Area after graduating. Some of them would prefer a sunny beach town. This may sound silly but it can be very important to a specific demographic (for example when I graduated from Stanford I preferred to move back to Los Angeles). In this talent demographic, Snap has no real competition from other tech companies in Los Angeles. It is the top and almost exclusive picker. While Uber, AirBnB, Dropbox, Palantir, Pinterest, Stripe have to fight with each other over Bay Area’s talent, Snap can focus on its progress.
b. The network of the leadership team can be very useful for recruiting. As both of the founders are recent Stanford graduates, they have access to a very strong recruiting network. Stanford University is a significant source for startup recruiting because of its exceptional tech talent and its entrepreneurial spirit.
Both founders are fairly young and therefore personally and in their network well connected with the most recent graduating classes. Nothing makes recruiting easier than a trusted source of recommendations.
c. Finally, LA’s top talent pool from Caltech, UCLA and USC that wants to stay in town and find an entrepreneurial tech company to work for has a promising candidate now. In LA the only real recruiting competition for Snap, in the entrepreneurial minded demographic, is SpaceX. But SpaceX caters to a slightly different skill pool.
3. The Younger Demographic Bias
Snap has one of the youngest user demographics of all social media type companies. Most of its users are under the age of 24. For Wall Street this could be a source of confusion but it is actually an advantage from the perspective of a long-term investor.
a. We hear that Snap’s user growth is slowing down maybe due to Instagram copying Snap’s features. But it’s also possible that Snap is saturating in its key demographic of under 24 year olds, which is not necessary a bad thing. This could just mean that they have captured most of that demographic in the US and could be currently struggling with the older demographic.
Max Planck once said that resistance to a new idea vanishes not because its opponents convert but because they pass away.
Sorry to sound dramatic, but what I am trying to convey is that it could be more difficult for Snap to attract a 34 year old user today because that age group may find Snap strange. But in ten years Snap’s current users will be 34 and Snap will overtake the older demographic not by conversion but with time. What matters is the penetration and engagement in its key user demographic. This is one of the concepts that many Wall Street analysts do not understand with generational products.
b. Naturally, Wall Street investors are much older than Snaps key demographic. Very few of them probably use SnapChat. Therefore Wall Street is more likely to undervalue the transformative potential of this company because it has a perspective bias. Each generation comes with its behavioral phenomena that the previous generations do not understand. SnapChat is just one of these generational phenomena. This perspective bias was also the case for Facebook. I still remember in 2010 how one of my economics professors completely misunderstood the impact of Facebook’s revolution because he was older. As I was much younger, the scale of FB’s transformation was clear to me already by 2008. Most Wall Street analysts are likely to misunderstand Snap's sociological impact.
c. This last point is related to the younger demographic but can be also considered a recruiting criteria. The next generation of youth is experiencing high school and college while a significant part of their social life relates to Snap. Naturally this makes Snap a very desirable workplace for them. This was one advantage that Facebook, as a college centered product, had over MySpace with its mature audience. The desirability of a workplace was an advantage that contributed to Facebook’s success. Ten years ago many did not realize this aspect when they were comparing Facebook and MySpace.
4. The Camera Play Ecosystem
Snap calls itself a camera company but Wall Street is not taking that seriously yet, because Wall Street does not see a significant profit factor in cameras. This is a misunderstanding because Snap does not even need significant profit from the camera for it to be impactful.
a. For Snap hardware can be a significant source of differentiation from other content companies and especially the copycats. If Snap can introduce more cameras in addition to the Spectacles, it will create a stronger ecosystem. Snap could provide AR-enabled, 360-enabled or other innovative cameras. Providing innovative cameras that are well integrated with SnapChat not only will provide more content but also increase the switching cost for the user. It will be difficult for others to copy this ecosystem approach. A past article discusses the transformative potential of the Spectacles.
b. Snap can take market share from GoPro and all the other action camera type companies because it has something all the others don’t, a distribution network. Many may remember GoPro calling itself a media company when it went public. But this is not a good analogy.
Going from software (distribution) to hardware is easier than going from hardware to software (distribution). This is because making a camera although still innovative is something well known and has been executed by many companies.
But creating a large-scale content distribution network is very hard to do and few have succeeded. This is where GoPro failed. It requires software DNA in a company and innovation that is not as easily replicable as making a camera. Although GoPro failed in becoming a media company, Snap will succeed becoming a camera company and capture the market of all the GoPro like companies.
c. By entering the camera space Snap is not only going into hardware but also taking hold of its value chain. Taking over the value chain to innovate faster is a topic I discussed in another article about Tesla. Snap will be making the camera, distributing it through its sales channels (as funky as the SnapBot) and bringing more content to SnapChat. This will help Snap to innovate faster in all areas. Snap is even considering going into web infrastructure, since it is a large portion of Snap’s cost. It is also an important innovation component for providing bandwidth for its rich and engaging content.
Lastly, I want to briefly discuss the company’s CEO, which is one of the most important factors for a high growth company’s success. One of my past articles discussed how to assess highly innovative tech company CEOs. I don’t have that much insight on Evan Spiegel, since Snap is not public yet, but he seems to have unique leadership and innovative abilities. Over the years he has proven many doubters and shown how drastically Snap can innovate in the backyard of Facebook, Instagram and Twitter.
Investors are concerned that Snap’s founders have too much decision power. I remember five years ago in my venture capital class our professor discussing how too much founder power could be a negative. Since FB was just preparing to IPO, I brought up that Zuckerberg has majority voting power and I didn’t think that it was bad. We know how that turned out. When it comes to decision power at disruptive, high growth companies, I actually prefer brilliant, innovative CEOs to shareholders.
Wall Street may be divided about Snap’s future and in the short term the stock could move uncontrollably, have an initial IPO pop, drop or stay in a range. Since all the above criteria are long-term phenomena and Wall Street usually focuses on short term metrics like revenue growth or user growth, the Street will likely underestimate the above mentioned aspects. But in the long run, once there is enough visibility in Snap’s transformative nature, it could change to a steady growth. In the long term Snap will succeed given all these differentiators in leadership, recruiting, demographics and technology.
Since I am a dyslexic, I am prone to spelling and grammar mistakes. Hopefully it does not distract from the substance of the article.
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