by Matt Kapko

What Snap can learn from Twitter ahead of its IPO

Nov 14, 2016
Consumer ElectronicsInternetSocial Networking Apps

Snap and its Snapchat app are the talk of the tech town today, but the company has not yet proven its worth to Wall Street. If Snap doesn't want to become the next Twitter after its upcoming IPO, it will have to avoid Twitter's mistakes.

snapchat logo post it notes
Credit: REUTERS/Mike Segar

Momentum is important for an organization before its initial public offering (IPO), and Snap, maker of the Snapchat social network, has no shortage of it as it prepares to go public during the next few months. The popular messaging and entertainment app continues to grow quickly, with about 150 million daily users as of June, according to Bloomberg. Snap also last week released a limited supply of a new set of $130 video-recording glasses, called Spectacles, to drum up more interest and prove it can sell hardware. 

Snap’s trajectory contrasts with Twitter’s path. That company was growing when it filed its IPO in late 2013 but stalled quickly thereafter and since failed to reinvigorate its business. As Snap inches closer to its IPO, it can learn some important lessons from Twitter’s blunders.

For Snap, successful IPO starts with fundamentals

To execute a successful IPO, a business must be able to demonstrate a company-wide understanding of the fundamentals, according to Brian Blau, research vice president at Gartner. A proven revenue stream, engagement and enthusiasm from customers, and a path for continued growth are all essential, Blau says. “You’ve got to make sure you’ve got a long runway with your customers.” 

Gaining new customers can be as important as engaging existing ones, he says. Snap already has a large, dedicated daily audience in North America in particular, but those challenges will be will be key points of concern when the company shares more specifics in its S-1 filing with the U.S. Securities and Exchange Commission (SEC), according to Blau.

[Related: Why Snapchat’s Memories broadens snap appeal]

“I don’t necessarily think that [Twitter] knew its business fundamentals up through the IPO,” he says. “They didn’t understand the dynamic of the market that they are in and that’s part of business fundamentals.”

Snap also should not assume its pre-IPO strategy will succeed in perpetuity. “That’s clearly not a winning strategy,” Blau says. “Twitter’s proved that.” 

User base, leadership challenges linger for Snap

Snap’s business today appears to match the traditional trajectory of free or cheap online social services, such as those provided by Facebook, LinkedIn and Twitter, according to Blau. “They start the monetization ramp relatively slow, they measure for tolerances along the way and eventually they max out at some higher level where they’ve fully saturated users with monetization opportunities.”

Investors will now want to define where exactly Snap is on that plan and how it will get to those higher ad-to-content ratios, Blau says. “That’s what investors are going to buy into now.”

The growth of Twitter’s user base waned since its IPO, but the company did a good job selling ads and putting more of them into users’ feeds, Blau says. During the days before Snap’s IPO, however, it’s probably more important for the company to address existing questions related to its user base. Those questions, according to Blau: Who are Snap’s users? How often are they engaged on the app? And how likely are they to view ads and make purchase decisions on Snap?

[Related: Instagram takes aim at Snapchat with disappearing ‘Stories’]

If Snap hopes to avoid some of the mistakes Twitter made after it went public it needs a strong, stable and experienced leadership team that investors can rally behind, according to Blau. Executive turnover has been a near constant at Twitter. Just last week COO Adam Bain, Twitter’s longest-serving and best-regarded executive, stepped down after six years with the company. Potential investors will heavily vet Snap’s executive team, including founder and CEO Evan Spiegel, during the IPO process, according to Blau. 

Today momentum and popular culture fuel Snap’s ascendancy. If its leaders can execute, Snap’s IPO could prove to be only the start of a long successful run. If it follows in Twitter fraught path, the IPO could be the beginning of the end.