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Snapchat has hired Morgan Stanley to raise debt financing

Snapchat isn’t selling more equity right now, and it isn’t talking IPO — yet.

Business Leaders Converge In Sun Valley, Idaho For Allen And Company Annual Meeting Scott Olson / Getty

Snapchat has taken out a new line of credit, according to multiple sources. Morgan Stanley is the lead bank on the deal, with other banks also in the fold, these sources say.

It’s unknown how much money Snapchat has lined up, or why it needs it. But it’s clear Snapchat no longer wants to dilute its shareholders by taking on new investment in exchange for equity. Snapchat has taken what’s called a credit facility, which means it can borrow against that at any time, but it hasn’t pulled any money yet.

The startup so far has already raised well over $2 billion, most recently at around a $16 billion valuation.

Snapchat has agreed to a new line of credit just as The Information reported earlier this week that it’s talking to banks about a potential IPO.

While the company talks with banks regularly, and the banks clearly wants its IPO business, it hasn’t entered into any serious discussions for a public offering, sources say. The credit facility was a more pressing matter for Snapchat, and it has not yet hired a banker to handle the IPO process, sources tell Recode.

Still, this is good news for Morgan Stanley. Every investment bank on Wall Street will be interested in underwriting Snapchat’s IPO whenever that comes along, and having an existing relationship with the company can’t hurt. One source even said that Morgan Stanley Managing Director Michael Grimes is Snapchat CEO Evan Spiegel’s favorite banker.

A Snapchat spokesperson declined to comment.

Taking out a line of credit can be a precursor to an IPO. Facebook took out a line of credit back in early 2012 ahead of its IPO, for example.

But sources say a Snapchat IPO is still likely a ways off, with numerous sources predicting a mid- to late-2017 target date. That can change, of course, as the process to file reams of financial information with the SEC and roadshow the company with potential investors is often a lengthy and drawn-out process.

Snapchat executives have told people in the past the general health of the stock market will be a major factor in its IPO timing. CEO Evan Spiegel said publicly at Recode’s annual Code Conference in 2015: “We need to IPO. We have a plan to do that.”

That was 15 months ago.

One good sign for those anticipating an IPO is that Snapchat’s business is growing. The company is on track to beat its $350 million revenue goal for 2016 and the company will likely generate around $1 billion in yearly revenue next year, according to multiple sources. Snapchat had previously told investors it would be a $500 million to $1 billion business in 2017, so expectations are on the high end.

There are still obvious hurdles. Snapchat’s business is still young, and therefore unpredictable. The company doesn’t have a key ad product like Twitter did with promoted tweets or Facebook did with its News Feed ads. (You could make an argument for Snapchat’s short full-screen video ads, called Snap Ads, but the company still sells those manually.) Snapchat is building an ads API to automate this process, but it isn’t yet making money.

The company will have to deliver a clear ad product ahead of any IPO to stoke confidence among investors.

For advertisers looking for alternatives to Facebook and Google, though, Snapchat and its young audience are an attractive option. It’s unclear how much Snapchat could raise for its IPO. The Information reported that the company wouldn’t look for a major premium above its current $16 billion valuation.

For kicks, let’s look at where Facebook went public back in 2012. It had revenue of $3.7 billion the year leading up to the IPO, and priced its IPO at $104 billion, a multiple of 28 times. If Snapchat goes public late in 2017 as a $1 billion revenue business, that same multiple would give it a near $30 billion valuation.

It’s possible that Snapchat will seek an even higher valuation for its IPO given how fast it’s growing and its strength among younger users.

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