Snapchat Reveals $650 Million Private Placement

29 May 2015 | Author: | No comments yet »

People worrying about a technology bubble keep making this mistake.

Los Angeles’ most famous technology start-up has raised $538 million from a collection of 35 investors since mid-February and could raise $112 million more, according to a filing with the Securities and Exchange Commission on Friday. Snapchat Inc. disclosed it has offered to sell $650 million of stock in a private placement, an opportunity for the company and insiders to profit from the messaging company’s popularity.Snapchat this morning disclosed in a regulatory filing that it has raised $537 million in new venture capital funding, with the possibility of raising upwards of $600 million.

Snapchat CEO Evan Spiegel warned of a tech valuation bubble (or maybe a general stock market bubble) at a Re/code conference earlier this week and got his remarks picked up at CNBC, the LA Times, and all over the business press.brass has been making headlines all week, what with co-founder and CEO Evan Spiegel’s rare profile in Bloomberg Business and his admission that the Venice, California, startup is eyeing an IPO during his keynote conversation at the Code Conference. Shares being sold in the up to $650-million round of funding, if completed, are being priced such that Snapchat is valued at $16 billion, CNBC reported Friday. This means that the instant messaging giant has raised around $1.2 billion in outside funding to date, at a valuation that is said to be in excess of $15 billion.

It’s extremely possible that valuations will go down in the future, but if you specifically look at what he said, you can see that we’re actually in something like a bubble of bubble calls. Bloomberg’s Sarah Frier recaps her interview with Snapchat Chief Executive Officer Evan Spiegel for her cover story in this week’s Bloomberg Businessweek. But the number of dollars may be smaller than the significance of the deal’s financial structure, in that all of the $537 million was done in the form of common stock. Check out Jason Del Rey’s writeup: Spiegel said the investment bubble is being fueled by an “easy money policy” and low interest rates, which may not last a whole lot longer according to recent economic indicators.

Or, put another way, any new investors — including Alibaba Group BABA -0.97% — are subordinate to all of Snapchat’s earlier investors, and lack many of the investor protections (namely liquidation preferences) that are almost always associated with private tech company fundings (even large ones for “unicorn” companies). To underscore how unusual this structure is within VC circles, you can note that Snapchat’s filing indicates the first securities in this round were sold on February 17. That means Snapchat has been raising this round for months, even though it’s in the red-hot stratosphere of companies that can essentially just pass around the hat. With 100 million active daily users, the ephemeral messaging app has branched into media and advertising with its new Discover feature and the hiring of a CNN reporter to head its news efforts. Other investors include Benchmark, General Catalyst Partners, Institutional Venture Partners, Lightspeed Venture Partners, Coatue Management LLC and DST Global.

Users will not just be limited to browse through clips from ESPN and National Geographic, but also search for different retailer goods as they desire. Vertically oriented trailers, about 10 seconds long, for the movie appeared in the National Geographic channel on Snapchat and the short cosmetics ads came inside the Cosmopolitan magazine channel. The company has joined with media brands including ESPN and Yahoo on its Discover service, which shows news articles and videos that disappear after one day. It seems unlikely but, then again, not too long ago it was unheard of for so many private companies to raise over $1 billion at even higher valuations…

Generating a steady stream of revenue will be key to delivering investor confidence as Snapchat marches toward a potential initial public offering, perhaps sometime late next year. That genuinely makes other asset classes — everything from houses to ordinary stock shares to zany digital media startups — look more appealing than they would be in a world of higher interest rates. But “future valuations will change in response to changing objective conditions” is a totally different claim from “today’s irrational mania will evaporate and prove to have been a mirage.”

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