Idea to Corporation: A Lesson from Snapchat

Idea to Corporation: A Lesson from Snapchat

Some commercial trademarks– like Google, Band-Aid, and iPhone– have penetrated into our lives so much that they have seeped into our normal vocabulary. The companies to which these names are attributed are huge corporations valued in the hundreds of billions, yet they all started as small startups with little financing.

When an entrepreneur wants to begin building a company, it’s easy to forget that growth is a product of investment dollars, first from close friends and family and later from outside investors. This ensures that a new company can allocate sufficient capital to finance new projects. The personal bank accounts of the founders and their families can only move a startup so far. Once a startup can successfully produce a prototype for their good or service, then it should start seeking to woo investors so that it can growth further. By looking through the funding rounds of Snapchat, which just went public in 2016, we can explore how startup gain momentum through investments.

Snapchat was founded by Evan Spiegel, Bobby Murphy, and Reggie Brown in 2011, and launched the precursor to the current app called Picaboo. Soon Picaboo was renamed due to confusion with a printing company in New Hampshire by the same name. The founders then created Snapchat complete with the black and yellow colors and recognizable ghost character.

Before we analyze Snapchat’s path throughout this process, we must first understand how the process works on a general basis. After having extracted all the money possible from friends and family, a startup will then begin seeking external investment. Asking the general public for funding in an advertisement or online forum/social media post is illegal due to government regulations that restrict public solicitation; so, a startup must find an accredited investor for funding. To be considered accredited you must either have $1,000,000 on hand or have an annual income of above $200,000. Within these parameters, the U.S. government believes you to be competent enough to invest in what you wish.

There are two common avenues that startups typically take in order to gain their initial outside investment: accelerators and angel investors. This first level of raising money from external investors is called the seed stage. Accelerators (also known as incubators) are programs that offer work space, advisors, and limited cash that usually sums up to about $25,000 for 5 to 10% of the company. This method is especially helpful because of its advisory component so that the startup makes good decisions in the beginning of the startup’s life.

On the other hand, angel investing deals with larger sums of investment money and in turn more equity. Angel investors are wealthy individuals who see a potential for growth in a startup, and they fund the startup in return for a share of the company. For Snapchat, Jeremy Liew of Lightspeed Venture Partners gave $485,000 in the seed stage of funding for Snapchat. This money facilitated Snapchat’s further expansion by most notably funding its introduction to the Android version of the app, which added a whole new set of consumers to its user base.

Past the seed stage is the venture capital stage of investing. There are a few differences between venture capital and angel investing. First, venture capitalists are typically organizations or partnerships where money is pooled together rather than singular investors. Second, investment sizes are much greater in the venture capital stage, usually $500,000 or more; angel investors rarely lend more than that. Lastly, since the company would have already entered the market and begun production during this stage, venture capitalists are investing in the company itself, but angel investors determine their investment on the basis of the founder and his abilities because the company is little more than an idea and a prototype at the seed stage.

There are multiple rounds of venture funding, and it works that your first round of investing is series A, second round is B, and so on. It is typically at this point where startups will be bought out by other companies. In fact, Facebook offered $3 million for Snapchat, but the offer was rejected by the co-founders who still wanted to expand the company themselves.

Snapchat went through multiple rounds of venture investments all the way up to series F, where they raised $1.8 billion from venture capital and corporate organizations. Although Snapchat had relatively many rounds of venture investments, other startups will only have one or two rounds before an IPO or being bought out. Google, Apple, or Yahoo all had three or fewer rounds in the venture stage. However, the money from venture capitalists allowed Snapchat to grow and evolve even more to provide more unique features in the app such as video messages or the ephemeral chat addition that included a live video chat option.

From the venture stage, a successful company can do one of two things: issue public shares through an IPO or go through a merger and acquisition process that will join the company to another. By issuing public shares, the startup can raise money relatively easily from thousands of different people. When a company issues shares to the public for the first time, it is known as an initial public offering (IPO). However, the company only gains capital when the share is bought directly from the company, so buying from a previous shareholder has no effect on the company itself other than that the new buyer owns part of the company.

Snapchat raised about $3.4 billion from its IPO which valued the entire company at nearly $20 billion. On its IPO date, it sold 200 million shares at a price of $17 per share. Now Snap Inc., the parent company to Snapchat, has even more room to grow and expand its application and user base by adding more features and even selling new physical merchandise like the Spectacles.

Progressing through each of these stages of investment and growth is not a quick process. Although Snapchat took 6 years to go public, Uber still has yet to enter the stock market, and it is nearly 9 years old. The amount of time in each stage varies depending on the goals of the company and how it plans to grow. If a startup does not need more money at a particular time, then it will simply not seek to raise more money.

It is truly amazing to see how a few friends can turn a simple idea into a massive worldwide corporation. Just 6 years ago Snapchat did not exist, and now it’s hard to find a college student who does not have the app downloaded onto his or her phone. This is exactly why so many venture capitalists love to do what they do. They are able to see a company grow from infancy to maturity, almost like a child.

 

Sources:

Admin. “How Do Angel Investors Differ from Venture Capitalists?” Rockies Venture Club, 12 Jan. 2014.

Crunchbase, www.crunchbase.com/.

Lee, Edmund. “Snap’s IPO Explained: Snap Just Raised $3.4 Billion.” Recode, Recode, 2 Mar. 2017.

Nusca, Andrew. “Snapchat: An Abridged History.” Fortune, 5 Feb. 2017.

Tao, Minh. “How Funding Works – Splitting the Equity Pie with Investors.” LinkedIn, 7 July 2015.



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