When Chi-Hua Chien was a young associate for venture capital firm Accel Partners in 2005, he brought an exciting new company to his bosses.
Soon after that the VC firm invested in Facebook, and the rest is history.
Now Chien has his own firm, Goodwater Capital, and he and co-founder Eric Kim, have set their sights on what many think could be the next hot internet IPO: Snapchat.
The pair decided to write their own analysis of parent company Snap’s IPO prospectus, doing a little bit of illustrative modelling to put Snap’s future growth in perspective of other companies.
To be clear, neither Kim or Chien are Wall Street analysts, and they’re not issuing a “buy” or “sell” rating on Snap. But with investors and tech industry insiders just getting acquainted with Snapchat’s business following the release of Snap’s S-1 filing, Chien and Kim thought it would be good to simplify the filing’s language into something startups and investors can understand — and to add some of their own analysis and insight based on their experiences as early investors in tech companies.
“There’s a pretty big gap between how Silicon Valley thinks and how Wall Street thinks,” says Kim, who was an early investor in Twitter.
Illustrating the future
Should Snapchat follow the growth rates of other consumer startups, Goodwater Capital projects that the company will grow its overall gross revenue from $US404 million in 2016 to $US14.8 billion by 2027. At that rate, it will take until 2020 for Snap Inc. to reach profitability.
But none of this is guaranteed.
“The crux of the issue here is how powerful is their ad unit,” Kim told Business Insider.
For one, Snapchat needs to prove that its advertising unit can siphon away the advertising dollars from television as it believes it will. There’s also the question of demographics. A survey of more than 2,000 people performed by the firm showed that Snap hasn’t broken into the over 30 crowd — something Snap’s S-1 confirms.
In Chien’s view Snapchat will face two major questions:
- Can it break meaningfully out of the under 30 demographic?
- Can it break into Asia?
When Facebook went public at eight years old, there were signs that it was breaking into both markets, Chien says. Snapchat is still missing both of those ingredients, but it’s also only five years old and much earlier in the company’s revenue and growth stages, which means there could be a lot of runway left for investors.
The other big debate is whether Snap will be the next Facebook or the next Twitter. The former would make Snap another rocketship with an advertising-based money-printing machine, while the latter could bring challenges in monetisation and in growing the size of its audience.
Snapchat’s admittedly flat user growth doesn’t help matters, though the healthy revenue growth Chien and Kim project is encouraging.
For now, neither Chien nor Kim will say whether they think Snap will go the way of Facebook or Twitter. Instead, they defer to laying out the facts and projecting where it might go from here. You can read Goodwater’s full breakdown of the company here.