Markets In Action

Why Talk of Snapchat’s IPO Means Very Good News

The buzz surrounding Snapchat’s long-awaited IPO is growing steadily. The app’s newly-renamed parent company, Snap Inc. (“Snap”), announced it may go public as early as March of 2017. Snap’s announcement is exciting for both itself and the economy at large, as tech companies emerge from a 2016 slowdown.

Snapchat, the mobile-only social networking app, was released by Stanford University students Evan Spiegel, Reggie Brown, and Bobby Murphy in 2012. Since then, Spiegel, now CEO of Snap, has continued to launch new features and grow the company’s user base. Snapchat has become the most popular app amongst teenagers and 20-somethings, beating out Twitter, Instagram, and Facebook, according to a Piper Jaffray survey.

The tech sector has faced scrutiny in the wake of several poorly-performing IPOs. Investors became more discerning when companies like Square, Fitbit, and Etsy had their IPOs and struggled to maintain their initial share price. Until those potentially longer-term plays, tech investments had been booming, and the environment was characterized by bullish venture capital firms (VCs) and freely-flowing investment capital.

As the market tightened and deals took longer to close, the colossal valuations that were the norm in 2015 idled. In the first five months of 2016, 31 companies went public in the U.S.,  down from 69 in the first five months of 2015, according to Barron’s. 

Yet investors and entrepreneurs remain optimistic that a slowdown doesn’t necessarily mean bad news. “Every time that the market starts to get a little bit more frothy, there’s somebody out there that’s saying it’s a bubble. Everybody wants to be the person who calls the next bubble,” said Greg Gretsch, founding partner of Jackson Square Ventures.

Tech companies hoping to go public may be encouraged by the rebounding performance of public unicorns – that is, startup companies with valuations of $1 billion or greater that have gone public. At the end of June this year, such unicorns that had gone public since 2014 posted a negative median return. But by the end of the September, the median return reboundedto up 6 percent. Further, in June, the well-respected cloud communications platform Twilio went public and traded up 92 percent on its first day. As public unicorns increase their valuations and perform well, private companies may gain the confidence to follow suit.

Peers of Snapchat have also indicated interest in the public market. Spotify, Palantir and Dropbox are mentioned contenders for a 2017 IPO, while Airbnb and Uber are likely 2018 IPOs, according to several bankers and analysts. Speculation that these elite unicorns are looking to the market is boosting overall confidence.

Snap is seen by consumers and investors alike as a market leader. Their potential IPO is a prospective indication that the future is looking bright in the tech market.