London tech banker: Snap's IPO looks like a 'very risky' investment

Co-founder and CEO of Snapchat Evan Spiegel (L) and model Miranda Kerr attend the 2016 Pre-GRAMMY Gala and Salute to Industry Icons honouring Irving Azoff at The Beverly Hilton Hotel on February 14, 2016 in Beverly Hills, California. (Photo by )Kevork Djansezian/Getty ImagesSnapchat cofounder and CEO Evan Spiegel, left, and model Miranda Kerr.

LONDON — A top London technology investment banker says the blockbuster stock market listing of the company behind messaging app Snapchat looks like a “very risky” investment.

Asked about Snap’s upcoming IPO, GP Bullhound’s Manish Madhvani told Business Insider: “It’s very difficult, that market. I don’t personally like investing in that market — social, where the model is very dependent on advertising. I think it is very risky. The user growth [of Snapchat] is slowing.”

Snap, which is listing on the New York Stock Exchange later this year, is set to be valued at up to $US22 billion (£17.6 billion) and is looking to raise up to $US3.2 billion (£2.5 billion). It makes Snap the biggest US tech IPO since Alibaba’s blockbuster $US168 billion (£134.8 billion) float in 2014.

While Snap’s shares are set to be priced at the lower end of initial expectations, it is still a steep price for an unprofitable business with slowing growth. Business Insider reported that prospective investors at Snap’s New York roadshow event this week were “respectful but sceptical,” with questions raised about growth, revenue, its young user base, and competition from Facebook.

Madhvani said: “You’re kind of betting on two things: one is that they can engage a lot of the existing user base, but then they’re going to bring out a product that really takes them into a new area, to allow that sort of monetisation.”

Madhvani is the cofounder and managing partner of GP Bullhound, a London-based tech investment bank set up in 1999. The company has advised on over 230 M&A transactions and advised on fund raisings for companies such as Candy Crush-maker King.

Addressing Snap’s valuation, Madhvani told BI: “Is it worth that? I think you can see a clear path to where they’re going to get to monetisation of $US1.5-2 billion quite easily from what they are at the moment. But can they go massively beyond that? That’s the bet you’re really taking.”

Snap had revenues of $US404 million (£324.2 million) last year and Goldman Sachs is forecasting that the company will hit $US2 billion (£1.6 billion) in revenue by 2018.

Madhvani said: “Facebook has kind of become this platform that spans generations, it’s got such mass. Snapchat is still quite focused around a narrow demographic and that’s always going to be harder to monetise. They have not got the choices that a Facebook has.”

He added: “But I think [Snap] are doing the right things. If you speak to the ad agencies that deal with them, they say they’re by far the most innovative. They allow people to do the takeovers, they’re engaging with their users on a massive scale.”

Manish Madhvani, GP BullhoundGP BullhoundManish Madhvani, GP Bullhound.

‘You can’t run it in the same way as you would a bank’

Snap has also raised eyebrows for pursuing a float comprised completely of non-voting shares, meaning investors will have no official say in the running of the company. However, Madhvani says this is a prudent move that is necessary to deal with the fierce competition and rapid innovation cycles in tech.

He said: “The cycles have got compressed — this is why Snap are doing a lot of this talking about new forms of advertising and the camera technology because they know they can’t just keep doing what they’re doing, in two year’s time they will have to come out with another killer product or another killer function.”

Snap has recently branched into hardware with its video capturing sunglasses “Spectacles.” Madhvani said: “To allow that level of innovation, you can’t run that company in the same way as you would a building company or a bank that delivers very solid dividends. You sometimes have to say, we’re really reducing the dividend massively this year because we’re doing this WhatsApp acquisition or something like that.”

Having total control of voting rights gives founders this freedom, he said. “A lot of it depends on those CEOs, it’s very dependant on these visionaries — Zuckerberg, Steve Jobs. You’re buying into them, you have to get comfortable with that.

“I think [Snapchat] have been brave and the non-voting point is a classic example of that. They’re saying: ‘We’d rather be up front rather than surprise you further down the line.’ I think that’s good because people will only go in if they’re up for that rollercoaster ride. And it is going to be a rollercoaster ride.”

Madhvani added that investing in technology companies is “not for everyone.”

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