Snapchat essentially got its start by eliminating risk. Want to send a nude to a lover or a goofy face to a friend? Don’t worry, it’ll disappear in 10 seconds.
But now, as a startup that just filed to go public, the risks look pretty damn real. The word “risk” appears 87 times in Snap Inc.’s Form S-1 filed Thursday.
Here they are in summary, with our background and more plain English explanations:
1. Keeping its users happy
Our ecosystem of users, advertisers, and partners depends on the engagement of our user base. We anticipate that the growth rate of our user base will decline over time. If we fail to retain current users or add new users, or if our users engage less with Snapchat, our business would be seriously harmed.
Snapchat is reminding the public that one day it may not be the hottest app to the kids. In fact, we’ve already seen a slowdown in the app’s growth. A Bloomberg report from June 2016 revealed Snapchat had 150 million daily active users. According to S-1 filing, that came more than 7 months later, Snapchat has added only 8 million daily active users.
A lot of companies look outside the U.S. to boost growth. For Snapchat, that doesn’t look like the rosiest prospect.
But while its army of Snapchat users is much smaller than Facebook’s at more than 1 billion daily active, Snapchat touts its engagement — 25 minutes per user.
2. Playing in Google and Apple’s worlds
Snapchat depends on effectively operating with mobile operating systems, hardware, networks, regulations, and standards that we do not control. Changes in our products or to those operating systems, hardware, networks, regulations, or standards may seriously harm our user growth, retention, and engagement.
Snapchat calls itself a camera company, but it doesn’t exactly own the entire camera. It relies on Apple iOS and Google Android to host its app, the “flagship product.”
3. Relying on Google for a lot
We rely on Google Cloud for the vast majority of our computing, storage, bandwidth, and other services. Any disruption of or interference with our use of the Google Cloud operation would negatively affect our operations and seriously harm our business.
If Google, one of the most valuable companies in the world, were to shutdown its storage system, Snapchat could be in trouble.
4. The fickle advertising industry
We generate substantially all our revenue from advertising. The failure to attract new advertisers, the loss of advertisers, or a reduction in how much they spend, could seriously harm our business.
Snapchat has been clawing its way into advertisers’ budgets. It faces stiff competition from Facebook and Google, who are in what amounts to a duopoly for digital ads. The two tech giants together represented 99 percent of the U.S. ad revenue growth in the last year.
Meanwhile, each of these companies are trying to pull spending from TV budgets.
Snapchat is also admitting in its risk factor that it’s not — at least not yet — pulling in a lot of revenue from products. In the end of last year, Snapchat began selling Spectacles, its video-camera sunglasses for $130 per pair.
5. The need to keep making new stuff while maintaining the old stuff
If we do not develop successful new products or improve existing ones, our business will suffer. We also invest in new lines of business that could fail to attract or retain users or generate revenue.
Snapchat needs to keep making its stuff cool, while also making sure its existing stuff works as well. Otherwise, it won’t make enough money to justify the hype.
6. A long list of powerful competitors
Our business is highly competitive. We face significant competition that we anticipate will continue to intensify. If we are not able to maintain or improve our market share, our business could suffer.
It’s not a one-horse race. Current competitors are formidable foes that also “focus on mobile engagement and advertising,” according to the filing.
Here’s Snapchat’s full list of enemies:
Facebook, along with Instagram and WhatsApp
Google, along with YouTube
Naver, including Snow
Snapchat also writes that it competes with companies in “print, radio, and television sectors to underlying technologies like default smartphone cameras and messaging.”
These competitors, with their wealth of resources and massive user base (for some), also have the potential to mimic Snapchat’s technology. Snapchat is already all too familiar with the game.
7. Making money is… hard
We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability.
Snapchat has already been ridiculed for bleeding money. Its cash for 2015 was $640.8 million. In 2016, it was down to $150.1 million.
The company also lost a whopping $514 million in 2016.
Snapchat just admitted it may never make money. Like ever.
8. Attracting talent
The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could seriously harm our business.
Silicon Valley is a land of competition. Software engineers aren’t cheap, and they’re always looking for the best, most fun, and perhaps more importantly, most financially lucrative jobs. One day, Snapchat might not be the hottest place to work.
9. Young and unique
We have a short operating history and a new business model, which makes it difficult to evaluate our prospects and future financial results and increases the risk that we will not be successful.
Remember Snapchat is 5 years old. There’s still a chance that this whole thing just doesn’t work.
10. Getting hacked
If our security is compromised or if our platform is subjected to attacks that frustrate or thwart our users’ ability to access our products and services, our users, advertisers, and partners may cut back on or stop using our products and services altogether, which could seriously harm our business.
Snapchat has been through quite a few user privacy scares. A hack in January 2014 leaked the usernames and phone number of 4.6 million users.
Snapchat has since added two-factor authentication for users and worked to eliminate third-party apps from being used to scrap data.
But that doesn’t eliminate the risk of being hacked again, especially when you rely on third-parties, like Google Cloud, to store your information.
11. Math is hard
Our user metrics and other estimates are subject to inherent challenges in measurement, and real or perceived inaccuracies in those metrics may seriously harm and negatively affect our reputation and our business.
Snapchat relies on a lot of third-party companies and internal software to track its engagement. As Facebook has been shamed, publishers and advertisers rely on these metrics to do business.
When you lose the publishers’ trust, you lose their attention.
12. Complicated stock stuff
We are not aware of any other company that has completed an initial public offering of non-voting stock on a U.S. stock exchange. We therefore cannot predict the impact our capital structure and the concentrated control by our founders may have on our stock price or our business.
People who purchase Snap stock will have no voting rights. That means the board at Snap, led by cofounders Evan Spiegel and Bobby Murphy, will be able to make all of the decisions. As Snap notes, that type of distribution of power — or lack of thereof — is not popular in the U.S. market so it’s very much tbd on what will happen.
meanwhile this is a risk factor:
“Our two co-founders have control over all stockholder decisions”
— Erin Griffith (@eringriffith) February 2, 2017
But, in its carefully phrased S-1, Snap Inc. asserts that risk may also be its greatest strength:
“In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones.
This is because images created by smartphone cameras contain more context and richer information than other forms of input like text entered on a keyboard.
This means that we are willing to take risks in an attempt to create innovative and different camera products that are better able to reflect and improve our life experiences.
For potential stockholders, buying Snap is a bet on the future cards dealt by the two cofounders Evan Spiegel and Bobby Murphy. Some, like Facebook CEO Mark Zuckerberg and Amazon CEO Jeff Bezos, have earned that confidence.
Be careful, Snapchat.