Many things that used to be true primarily of the public market now happen within the world of private company investing, including the participation of mutual fund investors.
Now, you can add equity research reports to that list.
Goodwater Capital, a two-year-old venture firm, is today taking the wraps off a detailed snapshot of pre-IPO Snap, parent of the disappearing-message app Snapchat. In doing so, the San Mateo, Ca., firm hopes to differentiate itself from its venture peers while also seizing on an underserved opportunity: producing research that helps Wall Street understand tech companies — before their own banking analysts do the job.
It’s a role that has largely been left to the media, which has been dutifully poring over Snap’s roughly 200-page S-1 since it was made public on February 2. Many reporters have done an excellent job, too.
Still, it’s nice to be able to review a slightly more comprehensive report, particularly if you missed a lot of the coverage that emerged in the days after Snap’s S-1 was first spied in the SEC’s giant electronic filing bin. It’s particularly worth examining if you’re not a Snap aficionado and want to become one quickly, given that the company’s roadshow could reportedly begin this coming Friday.
Goodwater’s report was overseen by Eric Kim, a former investor with Maverick Capital, who launched the consumer-tech focused firm with his former Stanford MBA classmate (and former Kleiner Perkins Caufield & Byers partner) Chi-Hua Chien in 2014.
Kim previously worked on numerous high-profile deals for Maverick, like the the multi-platform texting app KakaoTalk and the e-commerce platform Coupang, and he clearly took his newest task seriously. In addition to its own analysis, Goodwater last month surveyed 2,076 participants who were evenly distributed across geography, age, and income, to produce some of its findings.
Says Kim of what motivated him, “I saw KakaoTalk evolve from a 15-person company into a very valuable public company and there was suddenly this huge gap to bridge, with Wall Street looking at very different metrics than we were accustomed to discussing. Our [Goodwater] report [on Snap] aims to provide a comprehensive picture of the company that both Silicon Valley and Wall Street can understand.”
Indeed, Kim says he doesn’t think people (i.e., reporters) are looking at the company in the same way that Wall Street is liable to evaluate it. For example, Kim notes that plenty of editorials have compared Snapchat with Instagram, but he asserts that even more than Instagram owner Facebook, Snap is “trying to take on the entertainment world and replace TV.”
In other words, a better comparison for Snapchat are more traditional entertainment companies. And rather than compare unprofitable Snapchat today to pre-IPO Facebook, which was very profitable, it might make more sense to consider the size of the overall entertainment industry and how much of it Snap can take on.
In case you are wondering, Goodwater says it does not own a stake in Snap.
The firm also plans to produce future reports on pre-IPO companies, including, potentially, Airbnb, Dropbox, and Pinterest.
We ask Kim what kind of a Wall Street rating he might assign Snap based on Goodwater’s research. Alas, he says that for the benefit of the company and future companies about which Goodwater may publish reports, the firm intends to stay neutral, “presenting facts and analyses that people can use to come up with their own conclusions.”
Pressed on his personal stance, he says that the “jury is still out. Snap has done an amazing job of getting to where it is today, but its average revenue per user is 1/10th that of Facebook. You could say that’s a problem, or you could view it as a huge opportunity.”
As Kim notes, Snap also hasn’t done a great job with international growth to date, losing market share to a Snapchat clone, Snow, that’s right now dominating Japan and South Korea. “It’s sometimes hard to see around that corner, but to be a multibillion-dollar company, you need to be international,” he says.
And again, Snap doesn’t have the same operating margins as Facebook — and it’s not clear whether it ever will. Says Kim, “It’s just a completely different medium, compared with Facebook or Twitter. No one has had a video-orientation first. So [Snap’s value to advertisers] is something we have yet to get a handle on.”
That sort of the point of Goodwater’s report, suggests Kim: while a lot of people seem to be making up their minds about Snap, and skepticism abounds, there’s still “much to be determined,” he adds. “It’s “part of what makes Snap so exciting.”
You can check out Goodwater’s full report on Snap — replete with business overview, key trends, summary financials, projections and lots of useful graphics and charts — right here.