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On March 2, Snap Inc, the company that owns messaging app Snapchat, was officially listed on the US stock market for US$17 per share – a feat that was described as the biggest since Facebook went public. With the initial public offering (IPO), the company was valued at US$24-billion while founders Evan Spiegel and Bobby Murphy became multi-billionaires. Not many knew one tiny but crucial piece of information about the achievement: the company has yet to make profit.
It also had an arguably bigger problem in that its young users are unhappy and are switching to other apps, such as YouTube. That’s not all, as a few days to the IPO, Facebook introduced a new feature in WhatsApp which could present Snapchat as unattractive to new users, and, in return, it could lead to investors having less confidence in the company.
It would not be surprising if Snap Inc had decided to put its IPO on hold until it was profitable, more attractive to users, and better positioned to compete in the ecosystem with Facebook and other somehow similar products. Instead, it pushed through with the IPO and the result was impressive as the shares were more than ten times oversubscribed on the New York Stock Exchange. The good part is that investors will not have voting rights in the company.
The African startups landscape perspective
Raising an IPO has always been one of the ideal and desired exit options for founders of startups across Africa. Quite a number of them have been able to successfully achieve this outcome and still be in charge of the company. However, to many, it is still a crazy dream and the kind of which can only be achieved in their wildest imaginations. The reason for this state of mind has a lot to do with the popular notion and unwritten rules about going public for tech startups on the African continent.
Lesson 1: any company can go public
It is widely believed that only household names like Aliko Dangote (Nigeria-born Africa’s richest man) can tap into the stock market to raise funds. The financial market reports on CNBC and other channels have also lead many to believe that only banks, manufacturers, fast moving goods and insurance companies can make use of the stock market to raise funds. While this is not true, not many founders of startups are aware of this. Any company in any sector can tap into the stock market.
As a matter of fact, the stock markets across Africa are in dire need of some exciting IPOs to inject excitement into a rather boring space since only stock market geeks are the ones that understand all the terminologies and graphs. But with randy tech guys seeking local listing on stock markets, stock reports could become exciting for everybody.
Lesson 2: you can go public without losing control of the company
The TV shows Empire and Silicon Valley are becoming popular in most African countries as well as among tech startups. Some of the storylines have portrayed companies going public, eventually resulting in the loss of control of the company in return for investments. There have been episodes where the original founders were kicked off the board of the company they founded or entirely out of the company itself.
Considering the CEO-tuned mentality which many startup founders in Africa has, the stock market is a no-go area to raise funds if it could potentially lead to removing them from the company. But has the Snap Inc feat showed, it is possible to raise an IPO and not lose control of the company in the process.
Lesson 3: being profitable is good, but is not a prerequisite
While many knew that Snapchat was going public, only a few people knew that the company had a revenue of US$404-million and a loss of US$515-million last year, yet the information was made public. This should make startup founders in Africa to be comfortable about going public with their company since not all investors would only invest in companies that are already profitable.
One thing about going public is that the company is the one that will choose the message it wants the investors to hear. Instead of pitching the account balance, investors will connect much better with information on what the company can become and how they will get returns on their investments.
While on a roadshow to sell the company to investors, Snap, per the BBC, was all about telling investors that it wasn’t going to become the next Twitter, and that while it too has slowing growth, the firm retains the “cool” factor and is working on exciting new ideas to keep its audience interested, engaged and, crucially, looking at advertising.
What they successfully did was to pitch the company’s potentials and this is what startups are already doing across Africa and its most popular founders are very good at pitching their companies to newbies and investors.
Lesson 4: existence of a bigger competitor isn’t enough to deter investors
Mark Zuckerberg posed a great threat to Snapchat since he owned Facebook, Instagram and WhatsApp – the three major apps on everyone’s phones. Many local startups would be threatened if they were to compete with such a competitor; this is further threatened by the decision of Facebook to roll out Snapchat’s signatory features on most of its services – yet Snap Inc was able to attract ten times more investors than it wanted.
In the various ecosystems in Africa, there are giant multinational companies that startups fear going against. For the payment and FinTech startups, their Facebook are the banks. While it may be difficult to go against them, it is not impossible since as the startups fear competing for investors with the banks, so also are the banks afraid of the disruptive potentials of the startups. It would not be surprising to see banks themselves investing.
Lesson 5: the users are the number one priority
Something that is relatable in the success story of Snapchat, Facebook, and other tech companies that have gone public is the focus placed on customer satisfaction. Before spending a lot on PR, they ensured they had unique addictive offerings for targeted users who in turn couldn’t do without the products the moment they tried for the first time. There are very few of such presently in Africa – yet the startups are spending a lot on PR to gain users they cannot retain.
Most of the frequently used apps on the phones of many Africans are not African apps – they are mostly foreign but that had found ways to be more locally relevant than local ones. While it is good to pay for billboards, advertise on DSTV, sponsor Big Brother, and run multimillion-dollar multimedia campaigns to promote the company, such would eventually be in futility if the product being promoted is not strong enough to keep users addicted to it like Facebook, Instagram, Twitter, YouTube, WhatsApp and Snapchat. Who will invest in something that everyone can do without?
Feature image: AdamPrzezdziek via Flickr.