A Picture is Actually Worth $25 Billion, Not words
Surprise! All of those selfies you took with dog ears, “geotags” of your favorite dive bar, and the “killer sweet” signature filter on Snapchat may finally be worth something in the end!
Well…not to you.
Snapchat’s brand-new parent company, Snap Inc., is supposedly in talks to go public, but what does that really mean? And where in the world does $25 billion come into play?
Let’s first take a look at what it means for a company to go public or, in ‘finance-speak’: to make an initial public offering. An initial public offering, or IPO, is when a privately-held company decides to make ownership of it’s stock available to the general public.
But what makes a company private, as opposed to public? When a company is private, the ownership is centralized within a small number of individuals who may, or may not, have management control over the company.
To put it into perspective, let’s say that you wanted to start a lemonade company, which sells lemonade at the stand in the park. Your only problem is that you don’t have the money to build the stand or the money to buy the lemons, the sugar, and the ice. Well, now you have two options: you can borrow money from the bank and pay interest on the loan; or you can seek out people who can lend you money in return for an ownership stake in the company. These people could want to help you run the company by working the lemonade stand while you run around, taking selfies in front of everything you see, or they could want to watch their initial investment appreciate as the business grows.
As a business owner, you now have the opportunity to build the stand and buy the supplies you need to have the business take off, yay! Once your delicious lemonade becomes too popular for your stand, you’re faced with a big decision: limit your stand to a single location and cap the growth, or expand to the other two parks in town and make money hand over lemon? If you picked option A, we’re done here…but let’s suppose you picked option B! Now that you have your sights set on two new locations, you need to come up with the money to build the stands and buy the supplies–but there’s only one problem: you might not have enough money to keep up with all of your expenses if you dedicate so much money over the next few months to build stands.
And so, you need to decide how to raise that money: through loans; through another 10 private investors, who will only bring in the exact total of what you need; or by opening the company to the entire investing population, so that you can have enough money to build the first two stands, plus extra money for the R&D of your new product: frozen margaritas. Being the enterprising, young lemon-squeezer you are, you decide to open-up the company and fulfill your dreams of a lemon-based empire. Hooray! So what do you do, and why?
By taking a company public, you are serving an additional purpose: creating liquidity for your investors. Think back to the initial stages in your lemonade venture. You got money from your mom, your uncle, the mailman, and whoever else would loan you a few dollars to start your stand. Everything was great until the lemon famine. Prices skyrocketed and your profit margins nearly disappeared. Mom wanted out, but she couldn’t find anyone who was interest in buying and she couldn’t bring herself to tell you that you were doing a terrible job managing the business (“portion control!” she screamed). Mom sat through thick and thin, even when she needed the money back. But, now that you’re taking the company public, more people will be interested (and able) to invest in your company, and Mom will be able to sell it to the highest bidder. That’s because, as a privately held company, you can only issue shares under Regulation D (which states that you can only sell shares to a total of 35 accredited investors, among other things). An accredited investor is someone who has an annual earned income of $200,000 or a net worth over $1 million. That means that Mom would have had to find an accredited investor [dumb enough] to dump the shares onto.
In the case of Snap Inc. going public, it also means that they need more capital to build their lemonade stands, or Spectacles, or whatever it is that they actually make money from. So where does that put you? Well, as the great Warren Buffet says: “buy what you know and understand.” If you’re a avid Snapchatter and you understand their business model, their target audience, and their position in the market, it might be a good investment for you. That’s not to say that you can’t invest in them just because you like their main product and their direction excites you. Just like in the case of Facebook, many people (analysts included) didn’t really know what Facebook was really worth: you couldn’t just look at their assets, or their market, or even their product and truly understand how they would be profitable in the future. Facebook’s valuation before they had their IPO was about $80 billion, compared to the $25 billion valuation that Snap Inc. just received, based mostly on their daily active users and ad revenue from major news venues.
The wrench that Snap Inc has thrown into the mix is their newly announced Spectacles: a video recorder fashioned in the form of glasses so that you can take point-of-view Snapchat videos, without pulling out your phone. So the question arises: is Snapchat just another social media company, like Facebook, Twitter, or Instagram, or is something more? With the offering due to hit the market in March, and land as the biggest since Alibaba went public in 2014, we will see for sure if the pictures can withstand all of the hype.
My question: if the company is worth $25 billion, and I’ve taken a million pictures on Snapchat, does that mean they owe me $0.0004?