Investors aren't ready to sign up for Snap's IPO just yet

The parent company of Snapchat has a charismatic leader and an interesting story to tell. What remains to be seen is whether it can emphasize both enough to assuage investors' concerns about stalling user growth and increased competition.

Investors are skeptical about the road-show pitch by Snap Inc., set to be the first U.S. social media company to stage an initial public offering in three years.

Corporate communications pros say the company is facing significant hurdles. Snap has to push institutional investors past their skepticism of the overhyped tech IPO after watching Twitter crash and burn. It also has to make a compelling argument for its place in users’ social media diet.

Some experts say Snap has held its plans too close to its vest. The company, parent of ephemeral photo app Snapchat, reportedly cut its initial IPO target of $25 billion after some unfavorable investor feedback, and its new target of between $19.5 billion and $22.3 billion was taken as a sign the company is listening to the street.

Snap’s investor road show has hit New York, London, and Boston. Next week, executives will stop in Los Angeles and San Francisco before the company sets the final price for its stock on March 1. It has been working with a sole communications firm before its IPO, Sard Verbinnen & Co.

Snap’s road-show assets include a 35-minute video providing an overview of the company and its vision and two shorter videos: a product guide and advertiser testimonials from brands such as Anheuser-Busch, Gatorade, Target, and Universal Pictures

"Snap has a very experienced management team and a stellar product. They also have an excellent firm in Sard Verbinnen, and they are running a textbook IPO process," say Jim Wilkinson, chairman and CEO of TrailRunner International.

Wilkinson is the former head of international corporate communications at Alibaba. The China-based ecommerce giant worked with Sard Verbinnen on its 2014 IPO, as well as Brunswick Group and Hill+Knowlton Strategies.

Snap’s main video opens with 26-year-old CEO and cofounder Evan Spiegel introducing it as "a camera company"—setting it apart from other closely watched tech companies. Most internet-dependent companies have pitched themselves as marketplaces and asset-light businesses, so identifying with a traditional kind of hardware is a provocative departure, says Denise Garcia, MD of the investor relations division at ICR.

However, it is through that lens that Snap can explain its broader purpose—that it is more than just a cool app, she explains.

"It is important for them to get across that they aren’t going to be replaced by another app next year, that Snapchat isn’t a trend that advertisers have latched on to reach a fickle, young audience, and the market opportunity will continue to grow," Garcia says.

She adds that product identification also dovetails nicely into the company’s latest innovation: Snapchat Spectacles, which let users film 10-second "snaps" via a wireless video camera embedded in the sunglasses. Snap just started selling the product online in the U.S. for $129.99.

"To that extent, they are a hardware company," notes Garcia.

Mary Ritti, Snap’s VP of comms, declined to comment for this article, citing the quiet period companies take just before their IPO.

The sticking point: User growth
Snapchat has more than 158 million active daily users, and they create 2.5 billion snaps every day, according to its prospectus. However, user growth slowed in the second half of 2016, leaving investors concerned about competition, even as Snap blamed technical issues for the slowdown.

The company is also facing fierce competition. In August, Facebook introduced Stories to Instagram, a feature similar to Snapchat’s iconic format that allows users to post photos and videos that disappear after 24 hours. In an interesting bit of timing, Facebook made a similar update to messaging platform WhatsApp this week.

Will Kruisbrink, managing partner of the San Francisco office of Walker Sands Communications, says, "It doesn’t feel like Snapchat has a very defensible position in terms of its user growth, and that is one of the biggest metrics institutional investors look at."

He points out that Snapchat is trying to muscle its way into the advertising space, "but Facebook and Google really dominate. The problem that Snapchat faces is they are often compared to Twitter—they have a fantastic product, not a great business."

Some experts feel Spiegel is unwilling to share a roadmap with investors for growth, product development, and monetization. At the road-show stop at the Mandarin Oriental New York, Snap’s leaders reportedly chose not to answer a question about where they saw the company in five years.

Vested CEO Dan Simon says Snap is instead relying on the charisma of its 26-year-old CEO, who is reportedly being introduced in the road-show meetings as a "once-in-a-generation founder," an approach that has worked for companies such as Amazon, Apple, and Facebook.

"In the absence of being able to articulate their development pipeline, they are saying, ‘Look, our guy is a genius. He invented all of this amazing stuff and now the Sunglasses Spectacles. He’s going to come out with more things that you’ve never heard of,’" says Simon. "And they just may be right."

Yet Kruisbrink notes that strategy is risky, noting Spiegel’s past behavior, revealed in a series of crude and sexist emails he sent while a student at Stanford University. Media outlets such as CNBC, Slate, and the Financial Times have noted that in their coverage of Snap Inc.’s IPO due to its strategy of selling only non-voting shares—keeping control with Spiegel—as well as issues plaguing other Silicon Valley companies.

Ride-hailing platform Uber is under fire from inside and out after former engineer Susan Fowler blogged that the company ignored her sexual harassment complaints. On Wednesday, The New York Times provided an unflattering look within its walls in an article headlined, "Inside Uber’s aggressive, unrestrained workplace culture."

Although Spiegel has apologized, "the company is known in Silicon Valley for having this kind of toxic, bro-like culture," notes Kruisbrink. "And as we’ve seen happen to Uber in the past week, that can be really problematic."

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