US-based visual media platform Snap’s long-awaited initial public offering took place last week, the company pricing 200 million shares, about 6% of its stock, at $17 each, resulting in a $3.4bn windfall.
The flotation valued Snap, creator of the Snapchat messaging app, which has about 160 million daily users, and developer of hardware such as augmented glasses, at $24bn, a jaw-dropping 60 times its revenue. Its aftermarket performance lifted the share price above $24, meaning investors were trading the stock at nearly 100-times revenue.
While it’s not unusual for a company to go public before making a profit, it is nevertheless noteworthy that Snap’s losses have been increasing (they were up 38% last year) and the company has been fairly vague about how it intends to make a profit in future.
Adding to that struggle is the reality that Facebook is trying to steal Snap’s thunder by copying a range of features into its own suite of apps, which include WhatsApp, Instagram and Messenger.
Also noteworthy is that investors buying the new shares won’t have any voting rights, while co-founders Evan Spiegel and Bobby Murphy are reinforcing their hold over the company through their voting shares, a move taken from Facebook co-founder Mark Zuckerberg’s playbook.
Amid that enthusiasm, however, media operator NBCUniversal, a subsidiary of mass media group Comcast, paid $500m for a stake of about 2.1% in Snap through the IPO. NBCUniversal has previously bought stakes in private companies, investing $400m in BuzzFeed and $200m in Vox.
However, NBCUniversal’s investment in Snap is a bet both on its potential financial returns – perhaps with an eye on the subsequent success of Facebook since its own flotation – and an indication it wants to probably build a closer partnership with the hardware maker and communications service.
NBCUniversal CEO Steve Burke described the investment in a memo sent to staff that was obtained by news provider Recode as another step in a “growing partnership” with Snap. The companies worked together on the Rio Olympics and NBCUniversal media properties The Voice, SNL and E! News’ The Rundown have launched series on Snapchat.
While it has been increasingly common for corporations to try and build strategic relations with entrepreneurs in the private market – GCV Analytics tracked investment rounds of more than $83bn by nearly 1,000 corporate venturers last year – and there is a long history of larger corporations taking minority stakes in each other, there have been relatively few private corporate investments in public equities at the IPO stage.
More common has been mutual funds and other fund managers trying to invest in startups in order to understand the disruption that might impact their public holdings, and to potentially ease greater access to hot prospects at their IPOs.
In its annual letter to investors, mutual fund manager T Rowe Price’s $17bn New Horizons fund for the first time provided more transparency about its $1.2bn of investments in 63 private companies, including Twitter and GrubHub since 2009, noting annualised weighted returns of 34.8%.
The fund had previously only provided a list of individual investments, the purchase price and current valuations. It has 28 investments valued at a total of $836m in its current portfolio, including a $79m stake in GrubHub.
While the letter admitted that “any early-stage growth investment – especially a private investment – carries a high level of risk,” it argues that the strategy helped the fund understand industries under disruption and was a valuable contributor to returns, Henry Ellenbogen, the fund’s manager, told the Financial Times.
Fund rating agency Morningstar, which acquired corporate venturing portfolio company Pitchbook last autumn, counted 194 US mutual funds that have invested in 133 private companies, with their overall holdings valued at $11.5bn. Fidelity is the biggest investor in unlisted companies according to the study, followed by T Rowe Price and Hartford.