• by John Motavalli , Columnist, February 8, 2017

Something tells me that if companies didn’t have to file an S-1 document prior to going public, none of them would.

That’s because SEC rules require companies trying to get investors hooked to warn those investors about any possible pitfalls. And in the ad tech world, there are a lot of pitfalls.

We take you now to the Snapchat S-1, the only illustrated S-1 we have yet seen. Right after Snap’s claim of being a camera company, we see an illustrated company schematic and timeline, complete with cute little pictures. We were reminded of the infamous Time Warner annual report, the bizarrely illustrated  one from 1989 with the big headline “WHY?” on the cover.

Why Snapchat? Are 158 million users and 2.5 billion Snaps created every day their own justification?

After the usual caveat, “We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability,” Snapchat also admits:  “We are not aware of any other company that has completed an initial public offering of non-voting stock on a U.S. stock exchange. We therefore cannot predict the impact our capital structure and the concentrated control by our founders may have on our stock price or our business.”

Interesting.

As is the admission, “for all of our history we have experienced net losses and negative cash flows from operations. As of December 31, 2016, we had an accumulated deficit of $1.2 billion and for the year ended December 31, 2016, we experienced a net loss of $514.6 million.”

Not the kind of numbers investors like to see, especially when compared to the stratospheric profits of Google and Facebook. Though Snapchat’s ad revenue has grown six times in the last fiscal year, it’s still losing money. As Time Warner once asked, “WHY”?

It's All About Ad Revenue 
We learn that advertising accounts for 98% of Snapchat’s revenue. Snap lists its main competitors as Apple, Facebook (including Instagram and WhatsApp), Google (including YouTube), Twitter, Kakao, LINE, Naver (including Snow), and Tencent. But some of those companies have ad metrics that are, shall we say, a bit more accurate. Snap admits in the S-1 that the company didn't ask for users’ ages before June 2013, and for those users who signed up before that, their age is “estimated” based on “a sample of self-reported ages.” Hmmmm.

Even more interesting, we note a reference to revisions to the 1995 European Union Data Protection Directives, now pending for implementation in 2018. According to European Union documents, these revisions will include “an explicit requirement that obliges online social networking services (and all other data controllers) to minimize the volume of users' personal data that they collect and process.” That sounds pretty Draconian to us, and Snap admits that the new rules “could significantly affect our business.” You think?

Don’t get this column wrong. We think Snapchat is an impressive company on a bunch of levels. For one thing, it reports a six-fold increase in ad revenue for the 2016 fiscal year, year-to-year comparisons being $58.7 million in 2015 and $404.5 million in 2016.

Also, all of Snap’s ad revenue is from mobile, and that market is expected to hugely expand up to 2020, while total ad spend across the board is expected to contract. One campaign mentioned in the S-1 is for “X-Men: Apocalypse,” the movie from Fox, in which users could turn themselves into characters from the movie. This generated 298 million views, and users spent a collected 56 years playing with the Sponsored Lens application. The movie netted a 13-percentage-point increase in brand awareness.

Snapchat is also working with Vibrant Vertical, which lets brands with Snapchat vertical content reach additional users on more than 6,600 other publications. 

As we have noted in previous columns, Snapchat is the MTV of this generation. We believe that. But the rise of MTV, which we were there reporting on, was a stratospheric triumph accompanied by stratospheric profits. Why can’t Snapchat make money?

The Team Is "Kind"
One other thing we’ve never seen in an S-1 before: The company says its team is “kind,” and that’s so weird they feel they need to explain it. “When we say ‘kind,’ we mean the type of kindness that compels you to let someone know that they have something stuck in their teeth even though it’s a little awkward. We care deeply about kindness because we want to create a space that helps to give our team the courage to create. We think our team feels comfortable creating new things because they are surrounded by the kindness of their peers and know they have our support.”

That is perhaps the most oddball statement we have ever seen in an S-1. Gordon Gecko would be hurling if he read it. The company now has 1,859 employees, and I am sure that many of them are “kind,” but if Snap isn’t as ruthless as Google, maybe that’s why they’re not as wildly successful.

We also note that co-founder Evan Spiegel has a salary of $500,000, but that will be reduced to $1 a year, with a projected annual cash bonus of $1 million, after the IPO. That sounds kind to us. Sure, he doubles his income, but he can truthfully say he gets no salary.

The S-1 also reports that Snap has paid the law firm of Munger, Tolles & Olson LLP almost $300,000 in the 2016 fiscal year, and a similar amount in 2014. And that Spiegel’s father is a partner in Munger, though “John Spiegel has not personally provided any material legal services to us.” An interesting disclosure. Nice to know that Spiegel is “kind” to his dad.

And one more weird little factoid. The S-1 reveals that the company paid its third co-founder, Reggie Brown, $158 million to settle litigation he had filed. Brown allegedly designed the company logo, and recruited the current CTO. If you want the whole story, check out this piece in Business Insider. What’s next? A movie about Reggie Brown and Evan Spiegel, titled “The Social Network Part Two: The Snapchat Years?”