Full transcript: Kurt Wagner and Lauren Goode explain Snap’s IPO on Too Embarrassed to Ask

On this bonus episode of Too Embarrassed to Ask, The Verge’s Lauren Goode tapped Recode’s Kurt Wagner to share his insight into the paperwork filed by Snap in advance of the company’s IPO.

If you’re wondering why that’s such a big deal, you haven’t been paying attention: Although Snapchat burst upon the scene and seemed to outpace other social networks, nobody could really understand how or whether the company would generate revenue. A recent drop in growth makes potential investors even more curious.

You can read some of the highlights from their discussion at that link, or listen to it in the audio player above. Below, we’ve posted a lightly edited complete transcript of their conversation.

If you like this, be sure to subscribe to Too Embarrassed to Ask on iTunes, Google Play Music, TuneIn or Stitcher.

---

Lauren Goode: This is a bonus episode of “Too Embarrassed to Ask” that we decided to do after getting lots of questions from you guys about the $3 billion Snap IPO. This is the company that’s formerly known as Snapchat; now it’s called Snap, and it filed its paperwork to go public last Thursday. So I asked Recode’s Kurt Wagner to come and join me in studio to answer some of the questions you had about the S-1. Hi, Kurt!

Kurt Wagner: Hi!

Thanks for doing this.

Thanks for having me. We look at each other in the office all the time and I’m like, “I wonder what she’s doing on the podcast.”

“I wonder what she’s thinking.”

“I wonder what she’s talking about today.”

I know!

And now I finally get to be involved, so this is great, thank you.

Yeah, I’m really happy to have you on. You’ve been on the show before, right?

Yeah.

It’s been a while.

It’s been a while, but I think we actually talked about Snapchat before, if I recall.

We did, yeah. We’ve talked about Snapchat a couple times. We did a great episode with you some months back and then we did something about Snap Spectacles at the end of last year with Sean O’Kane from The Verge.

Yep.

So this keeps coming up, and we kind of had an idea that the S-1 paperwork was going to be dropping last week.

We did, yeah.

But before we get too in the weeds about that, let’s just talk about S-1 paperwork.

Sure.

Because this is something that we as tech reporters are really overly excited about. That’s how exciting our lives are.

I know, it was weird. Peter Kafka and I were sending each other YouTube clips yesterday to get fired up before before the paperwork dropped.

Fired up before the S-1!

You have to have the right mindset before you dive into some financials.

Into an S-1, yeah. I remember back in the day, when I was a video producer at the Wall Street Journal, some friends and I, we had plans to go to the beach. And one of my friends who was a reporter at the Wall Street Journal was reading the Zynga S-1 the entire time.

At the beach?

Yeah. He was just, like, diving in. It was so funny!

Leisurely reading!

And I was like, “Yeah, this is what we do.”

Yeah.

So for those who don’t know, what does it mean when a company files its S-1 paperwork?

So, this is basically the first time that they’ve publicly shared all of the information that we’re used to seeing from publicly traded companies. Facebook and Twitter, they have to report earnings every quarter. They have to tell us how much they’re making, how much they’re losing, how many employees they have. When you’re a private company, you don’t have to do any of that. You basically get the freedom, if you will, to struggle, or grow or build in private.

When you go public, you file this first look at the business. It’s the S-1. You file it with the Securities and Exchange Commission and it’s the investor’s first glance at all of those numbers that these companies have not talked about before. So that’s what Snapchat unveiled on Thursday. And for those of us who cover the company, it was kind of exciting because, you know, they’re relatively secretive, more so than other companies. And this has been a highly anticipated IPS, so it was our first chance to really see: How well are they actually doing?

Right. There have been a lot of questions around some of their metrics, I think.

Yes.

And as with any private company, they might raise funding from venture capitalists or private equity firms, and then that sort of gives you an idea of how much the company might be worth.

Right.

But you don’t really know what they’re doing, numbers-wise.

Right. And I think when they’ve been raising money at these valuations — I think the last round they raised was somewhere around 17 billion dollar valuation. Depending on who you talk to, it will fluctuate a little bit.

But, you know, that’s $5 billion more than Twitter’s worth right now on the public market, right? So when you hear those numbers, you say, “Okay, well, if people think that they’re valued that highly, they must have user numbers or revenue numbers or something that explains the confidence that investors have.” So this S-1 was our chance to see what investors have been seeing, behind the scenes.

Yeah.

And there were some interesting [numbers]. Some user growth, some revenue growth things that I think a lot of people would probably argue don’t merit the valuation that Snapchat’s already getting, but ...

So what were your key takeaways?

We kind of had a general idea already of what their revenue would be. It was just over $400 million. The significance there is that the year before, in 2015, it was like 58 million. That’s an almost (if I’m doing my simple math) eight times revenue jump, year over year. That’s pretty cool, that’s impressive.

Mm-hmm.

I think the concern is that Snap has 158 million daily users — which sounds like a lot, and it is a lot — but they only added five million users last quarter. That was kind of a slowdown of growth, and it was right around the time that Instagram and Facebook really started copying a lot of the features that Snapchat has. So I think if you’re a realist here, or maybe a pessimist, you might say, “Are Facebook’s efforts working? Are they slowing down Snapchat before it even gets to the public markets?” I think that’s a valid concern that was a little surprising.

And then, stuff, again, that I think we knew, but just to see it formally ... Evan Spiegel, for example, he and his co-founder Bobby Murphy, they control 88 percent of the voting at Snapchat. So nothing’s gonna happen at Snapchat without those two giving it a thumbs up. Those kinds of things, you know?

Mm-hmm, so they’re retaining control.

Total control.

In a pretty significant way.

Yeah. Very similar — Mark Zuckerberg does that at Facebook, Larry Page and Sergey Brin do that at Google. So it’s not unheard of, but it’s still interesting to see that this trend is continuing in these high-profile tech cases: That one or two individuals are basically calling the shots for the long haul.

Right. I mean, I have to say I’m really glad that you and I, Kurt, have managed to retain 88 percent voting shares of Vox Media.

Hahaha! Yes.

We’re running the show here, basically.

Yeah, Kara doesn’t do anything, Walt doesn’t do anything ...

Jim Bankoff is …

Never even heard of the guy.

He’s a great guy, but ...

Yeah, I take your word for it ...

He’s nice! You should have a beer with him sometime. But no control of the company.

Yeah ... That’s why we get to do these podcasts, because we call the shots.

Hahaha, that’s right, because we’re in charge of this particular startup.

Exactly.

Okay, so one of the things that you just mentioned would be identified on the S-1 as a risk, right? This idea that some of these other companies are copying some of their features.

If you have not delved into an S-1 before in the way that tech reporters do or financial analysts do, then you don’t see the tremendous number of risks that these companies have to identify, they have to put out there. And it’s, like, literally everything. It’s like, “In the event of this person dying, in the event of someone else copies a …”

Yeah. “If I trip on the sidewalk, it may impact our future financials.”

Right. What were some of the significant ... There was one around profitability that was pretty stark.

Yes. People got a little spooked by that one.

Yeah. Tell us about that.

So I see this as Snap covering its back, right? Or covering its neck, or whatever. They simply said: “We may never maintain or achieve profitability.”

Now if you’re an investor, that is not what you want to hear from your potential investment, right? I mean, the point of a company is to make more money than it spends and return that money back to its investors. So to hear a company say, “We might never get there,” I get why people are spooked.

You don’t go public with the goal of saying, “We’re never gonna be profitable.” My guess is this is simply folks who are saying, “Hey, legally, we should say this to protect our backs.” Right? Like, “We don’t want someone to come and say, ‘Well, you never floated the idea that you might not be profitable, so I’m gonna sue you, or claim that you’re misleading investors.’” I think a lot of the risk factors — is how I believe they’re described — I think a lot of those are just simply protections for the company. Then again, when you talk about competition, everyone mentions competition as a risk factor, right?

Mm-hmm.

That makes total sense. I think that’s way more concerning, in my opinion, than this idea that they’re never gonna be profitable. I think when you look at a Facebook and an Instagram, what they’re doing, that, to me, is more of a risk, if you will, than this idea that Snapchat doesn’t want to make money long-term. Of course they do.

I have one more question for you before we get to our reader and listener questions. In an article you published on Recode.net, you said that this S-1 reminded you more of Twitter’s and Facebook’s, if you had to compare it to another popular social network.

Yep.

Why did you write that?

I believe it was [in] mid-December, there was a story in the Wall Street Journal that said Snap’s message to possible investors was, “Hey, think of us as Facebook, not Twitter.” Right? That’s obvious. Facebook’s doing incredibly well, Twitter not so much. So, I get why they would want to convey that.

But then, when we saw the numbers yesterday, there were a lot more similarities between when Twitter filed its S-1 back in — I believe it was 2013, and Snap’s document, than Facebook’s S-1. And a couple of them are simply a matter of scale.

When Facebook went public, it was already bringing in revenues close to $4 billion dollars annually. Snap is $400 million. I think Twitter was, like, $320 million, around there, I’m ballparking. But, you know, not even in the same ballpark as Facebook. Twitter didn’t bring in a profit. Snap doesn’t bring in a profit, Facebook did. Twitter and Snap have almost identical employee bases. So all of those different things, to me, stand out as being much more Twitteresque than Facebookesque. And I thought it was worth mentioning, simply because of their mission here to convince people they are the next Facebook, not the next Twitter.

So I think if I will say one thing for Snapchat: They’ve only been around five years. Facebook had been around for eight years when they IPOed. So, you know, they’re doing this on a much shorter timeline. I think that they could grow into those expectations, absolutely. But right now, when you just look at the numbers, I think it’s much more Twitter than it is Facebook. Which, if you’re an investor, that’s probably not what you want to hear.

Right, that is concerning.

Yeah.

Okay, let’s get to our reader questions. And I have to give a special shout-out to Alex Hardy, who, he’s @canthardywait on Twitter.

Yeah, he had good questions.

He was the person who actually suggested: “Why don’t you guys do a special episode of this just to answer some of our questions?”

Yep.

And we said: “Hey, we actually do listen to you guys.” So thanks, Alex. And he wanted to know: “Why does Snap spend a million dollars a year on Evan Spiegel’s security? #tooembarrassed.”

That’s a really good question. So, I have met Evan a few times, and I can tell you that he takes his privacy very, very seriously.

Was that before he was dating a supermodel?

That was even before he was not only dating, engaged to a supermodel.

Or engaged, yeah.

So, I think this is a personality thing. I think Evan takes his privacy super-seriously. I believe he gets chauffeured around in a black Range Rover, pretty much everywhere he goes. He doesn’t drive himself.

Me too, to be honest.

Yeah, well, I know you do. But it’s surprising that Evan does too! I didn’t know he had the Lauren Goode treatment.

Clearly. Caltrain, all the way.

When you look at the personality of the CEO in this case, I think that’s where these expenses come from. I can’t break it down item for item. I don’t know if he has a dozen bodyguards. I imagine everywhere he goes, though, he’s just very hyperconscious of who’s around him, who’s taking pictures of him. And as a result he probably spends more than, actually he definitely spends more, than the average person on personal security.

That’s a great irony, isn’t it?

A little bit, right?

Someone who creates an app in which people are supposed to share all kinds of things with one another.

Yeah.

Although, you know, at its core, it’s about disappearing messages. So there’s some element of there not being a lingering trace of your activities.

Right.

But I mean, this whole idea is like, people should be sharing things, and that is very instrumental in the growth of his company.

Totally.

But he’s a very private person.

It is, and Snap is moving away a little bit from that super-private, disappearing stuff. Right? Like, stuff exists for 24 hours now. And I wouldn’t at all be surprised if, at some point, they add a feature where it exists for longer than 24 hours, and that you maybe even build out a little bit of a profile for business reasons. So yes, it is kind of ironic that someone who built a messaging and photo-sharing platform is this private. But that is Evan Spiegel.

A million bucks!

There you go.

We’ll have to see what it’s gonna be next year.

Yeah.

Or this year, 2017. So Alex also had another question, and I’m gonna throw this in there because I thought it was a good one: “Can you please explain how all of the voting and share classes work?”

I actually can, which is surprising!

Of course you can.

Because I was like, “Oh, I actually understand all this stuff.”

So, there are three classes of stock. What you really need to know if you want to invest in Snapchat is that you’re not gonna be able to vote for anything. There’s Class A, Class B and Class C.

Class A is what you’re going to be able to buy in the public market, and that comes with zero votes. So you can buy stock, but your voice is not going to be heard in the same way that maybe it would for other companies. Class B has one vote per share, and that’s primarily held by investors, executives, people who are already inside the company who are probably already making decisions [about] where Snap is going. And Class C shares are worth 10 votes per share, and the only two people who have them are Evan Spiegel and Bobby Murphy. When we talked earlier about them controlling 88 percent of the vote, it’s because those are the only two folks who have these special Class C shares with all, basically, the voting power.

So again, very similar to a Facebook or a Google. If you invest in Snapchat, you’re essentially investing in Evan Spiegel and Bobby Murphy and hoping that those two are going to make decisions that are good for the company and good for investors. Because there’s not really anyone else who’s gonna be able to stop anything they want.

Right. Not much else you could do.

Yeah.

Is there anything that could change down the line that would reduce their voting rights and maybe assign some of the rights to others?

Yeah. They could certainly sell shares, right? So they could just simply dilute their own ownership by cashing out.

What we’ve seen with Facebook, actually, is the opposite. Facebook recently added a new class of shares that had zero votes, with the sole purpose of keeping Mark Zuckerberg in control of the company.

So you know, there is a possibility they could add an additional share class or rearrange the voting structure of their existing share class. Maybe Class B shares would get five votes instead of one in the future. I’m not an expert in the sense of ... I don’t know how easy that would be. Again, I imagine Evan and Bobby would have to give it a thumbs-up, and I’m sure that they wouldn’t be eager to give other people voting power that they would then lose. So I don’t think it’s likely, but I think it is possible, if they wanted to do that.

Okay. John Kaldor had a question about Evan Spiegel’s bonus. “Is $750 million dollars a market bonus for taking the company public?”

Pretty sweet, huh?

I mean, not quite like ours this year. Hahaha.

Again, I know. These guys keep falling behind the Vox Media footsteps.

Clearly.

But this is an estimated bonus, first of all. So, my colleague Peter Kafka had a good piece about this on Recode yesterday, where if Evan took the company public — I believe it was just this year — he’s going to get roughly 3 percent of the company as a bonus. And at a $25 billion dollar valuation — which again is an estimate, that’s what they would love to get, doesn’t mean they’re going to get it, and that will fluctuate.

But at a $25 billion dollar valuation, that 3 percent amounts to $750 million dollars. So, we see a clear financial incentive to do this quicker versus, as we’ve seen with a lot of tech companies, drag out the private process. Right? Not everyone’s stoked to go be scrutinized by investors.

No, absolutely not. I’ve talked to CEOs before who have held off on IPOs for as long as possible because they say it is really not fun having to go into a room and take all your clothes off four times a year, once a quarter ...

Totally.

And say, “Okay, here’s all the potentially bad news that happened this quarter and could happen in upcoming quarters.”

Exactly. So we’ve seen companies drag that lifestyle out as long as possible. Evan was obviously incentivized to not do that. And it’s hard to imagine that this [bonus] didn’t play into the decision, at least in some regard. If he didn’t have the incentive, would they have gone public a year from now? Perhaps. We may never know. I’d love to ask him and see how much this pushed him forward, but at the same time, $750 million’s a lot of money. But the guy’s gonna be worth multiple billions of dollars soon, so it’s not as if this is the only reason he would want to go public.

Right. Okay. Some people actually didn’t send in questions, but just their thoughts on this. And this one was anonymous, but I did want to read a portion of this, it’s kind of lengthy. “As someone who worked in a large bank and used to read tons of analyst reports for fun, smiley face, their numbers are not flattering for several reasons.

1. They show that Instagram killed their growth once they copied them. That means the biggest question for public investors — ‘How will they grow their user base?’ — has been answered, and the answer is that they won’t. 2. Massive burn rate for a company that was swimming in cash.”

She goes on to explain that a little bit. “It does not help that Evan does not come across as likeable or as being someone who cares about his team or employees. 3. Having shown, over five years, little interest in making money. 4. They are extremely overvalued.” This is a very harsh look at the S-1.

Yeah.

Do you agree with any of that?

Why would you want to go public when you get these kinds of wonderful readers’ comments after sharing your numbers?

I know, exactly, yeah.

Yeah, I actually agree with a couple things. To say that growth is on the way down, I think, is a little premature but .... We mentioned this: I think that Facebook and Instagram have had an impact. And it seems clear, right? When we look at where Snap’s growth was going, for the first three quarters of last year they added an average of 15 million users. Then it got to Q4, which was right after Instagram rolled out Stories, and Facebook was rolling out a bunch of different Snap features in its app. It only added five million new users, right? That’s only a one-quarter example, so again, it’s a little bit tough to project this out too far. But I think that there’s no coincidence that Facebook and Instagram are probably having an impact on Snap’s growth. So, I think that is a valid concern. We’ve seen from Twitter what can happen when you don’t grow well. People don’t like to see that.

The cash thing is also really interesting. Snap lost more than half a billion dollars in cash in 2016. I think they lost, and I don’t remember the number off the top of my head, but more than $300 million in 2015.

What was their biggest expense?

We learned some of that. Some of that is that they’re using Google Cloud services, and they’ve promised $400 million in Google Cloud service purchases over the next five years. So that’s a $2 billion dollar commitment. That’s a lot of cash to spend for basically back-end, infrastructure support.

Otherwise, the employee base is growing really quickly. They have all these deals with content partners to try and get content onto Snapchat. I’m sure that that’s not cheap. I’ve heard that because there’s so much video on Snapchat, just simply server costs, and storage and all of that stuff is also not cheap. So we don’t know exactly, but we know that they’re spending way more money than they’re bringing in right now.

Again, it’s super early. They are five years old. They just filed their IPO paperwork, so this could change over the next couple years, but again, you know, companies are supposed to do the opposite. So I see why people like our anonymous reader are concerned.

What about Spectacles, the hardware? How big of an expense?

That was described as non-material to their revenue, and I’m not surprised.

Non-material, okay. Is that because they made so few of them?

I think so. They were selling them out of vending machines so even if they sold, gosh, I can’t imagine they sold more than 1,000 a day. Which sounds like a lot, but 1,000 a day is not going to probably move the needle for a company that’s making, or has aspirations to make, more than a billion dollars in revenue. And those are expensive to make too, right? Hardware is not cheap. You know this way better than I do. To keep things on schedule, and keep them affordable and actually get them in the hands of consumers ...

Right. Maintain quality, and make sure they work and they don’t have exploding batteries and all kinds of things.

Right. That is a very tough business, and so I don’t know if that’s going to be Snapchat’s core. I think it was a cool product, I think it was a trendy marketing stunt, if you will. But I’d be shocked if Spectacles are a core feature of their revenue in the near future.

If you had to guess, and we’ll make this our last question for this bonus episode ...

Sure.

If you had to guess a way in which Snapchat might diversify their product lineup in 2017, maybe the next 18 months, what do you think that might be? How are they gonna make more money?

We know that they talked with the Lily Drone company that just recently shut down. So there was at least some interest in the idea of having additional hardware, right? Like a selfie drone, or a video drone that you could then upload stuff directly to Snapchat. I’m obviously speculating here, because that deal didn’t end up getting done. But we know they’re interested in more hardware, so that’s one option.

I think the other and probably more realistic option for them is to get deeper into the media world. They have a Discover section right now, where a bunch of publishers will create stuff specifically for Snapchat, they’ll sell ads against it, that’s great.

Mm-hm. Including Vox.com.

Including Vox.com. I think that if you push that mission out a little bit and say, “Well, what if we’re not just doing news content, but we’re actually doing a television show?” Right? Or a movie. Or a music video. I think those are all areas that Evan is probably interested in. He’s super media-focused. A lot of their board members are involved in media. So I think we might see them evolve more so. It’s not just a place for you and me to send photos, but actually a destination for us to go be entertained beyond what we can do right now.

Right, and if you think about their core ... A large part of their user base are what, 18- to 24-year-olds? In the 18-to-24-year-old demographic.

Yeah.

Think about the media consumption habits of that target audience.

Right.

You know, they’re not gonna think twice about watching an entire TV show on their phones, versus maybe some people of a different media-consumption generation who say, “No, it has to be on my TV screen.” Right?

I think that’s exactly right. And we’re seeing that with Facebook, too, right now. They’re saying, “Yeah, we want to get way more video and we want people to watch that video on phones.”

Mm-hm. They’ll make a TV app, possibly.

I think Snapchat has the audience to actually succeed at doing that. So I bet we’ll see a lot more. I would imagine we will see a lot more of that moving forward.

Kurt, this has been great. Thank you!

Thank you for having me.

We should do more of these bonuses.

You know how to find me.

I know, because we just face each other, and stare at each other in the newsroom all day long.

Yeah, I know, and I just walk past you to get dried mangos from the snack bar.

Haha. I thought you were walking by to say hi.

No.

It’s okay. It’s just all about the LaCroix and dried mangos.

Two-for-one.

This has been another great episode of "Too Embarrassed To Ask" and Kurt, thank you again for joining in. He’s @kurtwagner8 on Twitter. Is that correct?

That’s right. Thank you.

I think I sometimes still tweet at the wrong Kurt Wagner but ...

That’s all right.

Whoever you are out there, sorry. Hope you’re enjoying our tweets.

---

This article originally appeared on Recode.net.