You are here

Snap IPO Tests Unsocial Network

Mark Zuckerberg says he created Facebook Inc. to make the world more open and connected. Twitter Inc.says it wants to give everyone the power to share ideas instantly.

Snap Inc., which this week could become the biggest technology public offering in years, is the unsocial social-media company. Not only does its app feature messages that disappear, the company defiantly operates unlike most Silicon Valley outfits, where collaboration and wide-open office spaces are prized.

Former employees say often the only way they knew co-founder and CEO Evan Spiegel was at work was by seeing his chauffeured SUV.  He avoids holding companywide meetings and prefers to dispense information to individuals or small groups, they say.

In contrast to the big, open campuses of Facebook and Alphabet Inc.’s Google, designed for employee collaboration, Snap doesn’t have a headquarters. Its main offices are scattered around Venice, Calif., keeping employees siloed and making communication difficult, the former employees say. The company in its IPO filing listed the lack of a headquarters as a risk factor that could hurt morale, prevent adequate oversight and cost talent.

Snap Inc. CEO Evan Spiegel in Sydney in December. PHOTO: MATRIX/GC IMAGES/GETTY IMAGES

So far, Snapchat has won legions of teenage users, who like that what they share now won’t define them permanently—and that it keeps their parents out of their business. And it has attracted advertisers who want to reach a young audience, setting the stage for Snap’s initial public offering. The listing on the New York Stock Exchange is expected to take place this week and could value the company at as much $22 billion, which would make it the biggest U.S. tech IPO in years.

A Snap spokeswoman declined to comment or make Mr. Spiegel available for this article, citing the company’s quiet period ahead of the public offering.

The question is whether this management style and focus on privacy will help the company compete with television networks and challenge the Facebook juggernaut. Mr. Spiegel’s approach at times has left staff in the dark about important initiatives, the former employees say. And it has made the company resist giving advertisers the ability to narrowly target users based on their behavior and preferences, a strategy that has enabled Facebook, Google and others to mint enormous profits.

‘Doesn’t talk much’

“Evan doesn’t talk much,” says Hemant Taneja, managing director at venture-capital firm General Catalyst, an early Snap investor, saying confusion can stem from the fact that Mr. Spiegel doesn’t always feel compelled to explain his concepts to the public.

In September, he surprised potential investors when he began publicly calling Snap “a camera company” instead of a social-media company. Some investors wondered if Snap was suddenly becoming a hardware company, but Mr. Taneja says the camera concept wasn’t new.

Rapid growth and increasingly intense competition are putting Mr. Spiegel’s management style to the test. Snap’s full-time workforce tripled during last year to 1,859 as it expanded internationally.

It is competing head-to-head with the global social-media giants, especially Facebook, whose Instagram unit already has emulated Snap’s features with some success, such as the Stories feature it rolled out over the summer. Snap in its public filing attributed part of its slowing user growth to increased competition.

Part of the competition is about the race to hook users first. Instagram is more popular than Snap internationally, and people could be inclined to stick with Instagram if they are already using Facebook, or with Snap if they landed there first. “You aren’t going to switch if you are satisfied with what you are using,” says Wedbush Securities analyst Michael Pachter.

Snap is also vying with traditional television networks to woo young viewers and advertising. Young people have been drifting away from television to their smartphone screen, where hours of videos from friends can be played.

Meanwhile, Snap must continue to generate unusual and captivating content—much of which has been meticulously managed by Mr. Spiegel, former employees and business partners say.

Like many tech executives, Mr. Spiegel attended Stanford University. But that is about where the comparisons end. He was more social than secretive when he arrived at college in 2008, friends recall, even though his high-profile lawyer-parents had had a rancorous and public divorce when he was in high school in Los Angeles. Far from geek, he was the life of the party, they say, and his style was more hipster than hoodie: skinny jeans, V-neck T-shirts, flip flops.

These days, Mr. Spiegel, who is more of a product designer than a computer scientist, eschews many of the tech industry’s habits, preferring to be away from what he has described as the bubblelike culture of Silicon Valley.

As he got to college, Facebook was taking off. In just four years since its launch in 2004, the social network had gained 58 million active users (it now has 1.9 billion monthly active users). In February 2009—during Mr. Spiegel’s freshman year—it added the Like button. From the start, Mr. Spiegel wasn’t a fan, friends recall. He would come to see it as a form of social pressure, where people create falsely perfect worlds in the quest to rack up likes.

Mr. Spiegel said Snapchat was much more, a place for spontaneous interaction that evaporates in the same way a real conversation would. It was also about creativity and fun: Photos and video could be animated in whimsical and ridiculous ways using its functions to make selfies that vomit rainbows, sport puppy and bunny ears, and wear banana faces.

In most cases, photos and videos that users send in messages disappear after they are viewed, and other content disappears after 24 hours, although some items can be saved.

In the recent company video, created for its IPO, Mr. Spiegel says the ephemerality is “why people love creating Snaps. Because there isn’t pressure to feel pretty or perfect. Self-expression isn’t a contest, it’s not about how well you can express yourself, it’s about being able to communicate how you feel, and doing that in the moment.”

Conceived for mobile

Also key to Snap’s success, and unlike incumbents such as Facebook and Twitter: Its design and concept is mobile-only. Content is presented vertically, to fill a smartphone screen; location-based tags and filters are popular; and bite-size content is swipeable.

As Facebook was trying to transition to mobile in 2012, Snapchat sped out of the gate, catching the bigger company by surprise. Mr. Spiegel saw the smartphone as the new movie screen. When Mr. Zuckerberg offered $3 billion to buy Snapchat in 2013, Mr. Spiegel turned him down.

Mr. Spiegel’s talent combining a Hollywood approach to content with a keen business sense is admired by many who know him.

“For someone of his age, he operates with much more wisdom than anyone else I have seen. I find him to be a very, very clear thinker,” Eric Schmidt, executive chairman of Alphabet, said in an email. When faced with critical decisions on issues like funding and partnering and selling, Mr. Schmidt says, “he gets it right every time.”

He says Mr. Spiegel, a former student of his at Stanford, is now a friend and customer. Snap has a five-year, $2 billion contract for Google to provide cloud-data storage.

Other people note Mr. Spiegel’s timing on the dominance of mobile, getting ahead of Facebook and the recognition that social media was getting boring.

Revenue is generated by brands placing short video advertisements and simple location-linked overlays called “geofilters,” plus more elaborate “Lenses”—Taco Bell made a Lens that turned faces into tacos being doused with hot sauce.

More than two dozen media and entertainment outlets, also provide news, sports, fashion and features. Advertisements are sold to place in the content the media companies produce.

Snap’s revenue last year jumped more than 500% to $404.5 million. Its net loss widened to $514.6 million, and its user growth slowed somewhat, rising 48% to 158 million in the fourth quarter from the same period a year earlier.

That revenue is a fraction of the $27.6 billion last year at Facebook, which also booked $10.2 billion in profit.

Mr. Spiegel has been wary of advertising from the start, worrying that it would feel intrusive. As his business marketing team was crafting presentations for prospective advertisers and business partners, Mr. Spiegel didn’t want to explain the app to them, said one of the former employees. He preferred that CEOs learn it—not from a presentation but from their children. It was “difficult for a salesperson to run that one up the flagpole,” the former employee recalls. A product demonstration is now part of the meetings.

When Snapchat’s first ads made their debut in October 2014—Facebook was already generating $12.5 billion in annual revenue by that year—Mr. Spiegel’s ambivalence was evident in a company blog post. It told users if they didn’t want to watch the ads, which were in a different section, “No Biggie.” The company wouldn’t place ads in personal communiqués because that would be “totally rude.” It wanted Snapchat advertising to be “the way ads used to be, before they got creepy and targeted.”

In the past, he has resisted efforts to collect and share information that would enable advertisers to target the app’s individual users. Lately, he has made concessions. In January, for example, Snap signed a deal with Oracle 

Ad targeting

Snap is still far away from the more aggressive approaches of Facebook and Google, which have used precise ad targeting to make billions in profits. As a result, the giants can outspend Snap on talent and fresh content, and bankroll development of potentially expensive new products, such as hardware that taps into augmented reality, or tech that blends computer images onto a user’s real view of the world.Corp. to help marketers use data from offline purchases, such as supermarket loyalty cards, to target Snapchat users with more relevant ads.

Because of Snap’s vision of ads as less intrusive than most digital advertising—more like old-fashioned television spots made for a broader audience—Snap ads must have a wider appeal, with high production values, and be spliced into the rest of the app in an interesting way. During the Super Bowl, for example, users could choose to adorn their selfies with either Falcons’ or Patriots’ football helmets or cascade gushers of colorful Gatorade over their heads.

Snap’s requirements set a high bar for its partners. The small group of media and entertainment outlets that appear on Snapchat have tough targets to meet, according to a person familiar with the process. If Snap isn’t happy, it suggests changes to the content, and if the material doesn’t get enough traffic, the providers fear they could be booted off the app, according to a current and a former editor of content for Snapchat Discover, the section of the app where publishers post content.

Until lately, a lot of Snap’s advertising has come directly from brands like Coca-cola Co. and Yum Brands Inc.’s Taco Bell. It has been slow to woo Madison Avenue’s big ad agencies, which have bigger budgets and can commit to longer contracts, and to form partnerships that would enable advertisers to measure the effectiveness of their campaigns. Last summer, Snap hired Viacom’s Jeff Lucas to help court big deals.

As the IPO has neared, Snap has signed deals with Oracle Data Cloud, Nielsen and others to ramp up its use of metrics that will dispel some of the mystery that has enshrouded the effectiveness of advertising on the app.

The stock-exchange listing will force more transparency about the business, including regular updates on user and engagement data. Even so, Mr. Spiegel will continue to keep a tight grip on the company after it goes public. Snap is selling to the public only shares that have no voting power. Afterward, Mr. Spiegel and co-founder and chief technologist Bobby Murphy will retain more than 90% of the voting shares.