LONDON — A top London technology investment banker says the blockbuster stock market listing of the company behind the messaging app Snapchat looks like a "very risky" investment.
Asked about Snap Inc.'s coming initial public offering, GP Bullhound's Manish Madhvani told Business Insider: "It's very difficult, that market. I don't personally like investing in that market — social, where the model is very dependent on advertising. I think it is very risky. The user growth [of Snapchat] is slowing."
Snap, which plans to list on the New York Stock Exchange next week, is set to be valued at up to $22 billion (£17.6 billion) and is looking to raise up to $3.2 billion (£2.5 billion). It makes Snap the biggest US tech IPO since Alibaba's blockbuster $168 billion (£134.8 billion) float in 2014.
While Snap's shares are set to be priced at the lower end of initial expectations, it is still a steep price for an unprofitable business with slowing growth. Business Insider reported that prospective investors at Snap's New York road-show event this week were "respectful but skeptical," with questions raised about growth, revenue, its young user base, and competition from Facebook.
Madhvani said: "You're kind of betting on two things: one is that they can engage a lot of the existing user base but then they're going to bring out a product that really takes them into a new area, to allow that sort of monetisation."
Madhvani is the cofounder and managing partner of GP Bullhound, a London-based tech investment bank set up in 1999. The company has advised on more than 230 mergers-and-acquisitions transactions and advised on fund raisings for companies including the "Candy Crush"-maker King.
Addressing Snap's valuation, Madhvani told Business Insider: "Is it worth that? I think you can see a clear path to where they're going to get to monetization of 1.5, 2 billion quite easily from what they are at the moment. But can they go massively beyond that? That's the bet you're really taking."
Snap had revenue of $404 million (£324.2 million) last year, and Goldman Sachs is forecasting that the company will hit $2 billion (£1.6 billion) in revenue by 2018.
Madhvani said: "Facebook has kind of become this platform that spans generations — it's got such mass. Snapchat is still quite focused around a narrow demographic, and that's always going to be harder to monetize. They've not got the choices that a Facebook has."
He added: "But I think [Snap] are doing the right things. If you speak to the ad agencies that deal with them, they say they're by far the most innovative. They allow people to do the takeovers. They're engaging with their users on a massive scale."
'You can't run it in the same way as you would a bank'
Snap has also raised eyebrows for pursuing a float consisting only of nonvoting shares, meaning investors will have no official say in the running of the company. Madhvani, however, says this is a prudent move that is necessary to deal with the fierce competition and rapid innovation cycles in tech.
He said: "The cycles have got compressed — this is why Snap are doing a lot of this talking about new forms of advertising and the camera technology because they know they can't just keep doing what they're doing, in two years' time they will have to come out with another killer product or another killer function."
Snap has recently branched into hardware with its video-capturing sunglasses Spectacles. Madhvani said: "To allow that level of innovation, you can't run that company in the same way as you would a building company or a bank that delivers very solid dividends. You sometimes have to say, we're really reducing the dividend massively this year because we're doing this WhatsApp acquisition or something like that."
Having total control of voting rights gives founders this freedom, he said. "A lot of it depends on those CEOs. It's very dependant on these visionaries — Zuckerberg, Steve Jobs — you're buying into them. You have to get comfortable with that.
"I think [Snapchat] have been brave and the nonvoting point is a classic example of that. They're saying, 'We'd rather be up front rather than surprise you further down the line.' I think that's good because people will only go in if they're up for that roller-coaster ride. And it is going to be a roller-coaster ride."
Madhvani added that investing in technology companies was "not for everyone."
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