Home / Technology / In Snap Inc.’s Tumble, Start-Ups See a Warning From Wall Street

In Snap Inc.’s Tumble, Start-Ups See a Warning From Wall Street

“There are a lot of very highly valued, money-losing unicorns, like Uber, Pinterest and Spotify,” said Kathleen Smith, a principal at Renaissance Capital, which manages exchange-traded funds that invest in newly listed companies. “This will put a damper on enthusiasm for their valuations.”

Scott Raney, a venture capitalist at Redpoint Ventures, said Snap’s performance was being closely watched because of the attention the company’s I.P.O. had received earlier in the year. “Start-up founders do pay attention to something like earnings, particularly with a company as high profile as Snap,” he said. “It was surprising that this happened so soon after going public.”

From the start, there was a disconnect between what Snap said it would deliver and what Wall Street wanted.

Snap’s public offering filings and pre-I.P.O. messaging included warnings that the business had lost hundreds of millions of dollars, that it might never stop losing money and that earnings would be unpredictable. Evan Spiegel, the company’s chief executive, told investors that what made the company special was not user growth, but how much time people spent using the app. In another warning sign, Mr. Spiegel, his co-founder Bobby Murphy and Snap’s largest venture investor, Benchmark, sold significant amounts of their stock when the company went public, which Ms. Smith said was unusual.

But investors clamored for a piece of Snap anyway, hoping it would be a tech growth story like Apple, Facebook or Netflix, and bid up its shares by 44 percent on the first day of trading.

A discrepancy between a tech company’s messaging and Wall Street expectations is a time-honored occurrence, one that has also bedeviled many of Snap’s predecessors. Most famously, Facebook’s stock tanked after its first earnings report as a public company in 2012, when the social network failed to live up to Wall Street’s high expectations for mobile ad revenue. Such constant investor scrutiny is often cited by tech entrepreneurs as a deterrent to going public.

For Snap, that disconnect was compounded on Wednesday in a conference call with Wall Street analysts. During the event, many analysts’ questions about the company were dismissed by Mr. Spiegel. None of the executives made a particularly impassioned case for why the business would be a success over the long term.

On Thursday, Jim Cramer, the investor and CNBC host, said Mr. Spiegel needed to be “hazed” and put through a “gauntlet” by investors because “he is so arrogant.”

Snap’s earnings showed that “your house has to be in order before you go public,” Ms. Lynn said. “Your job is to predict what you’ll hit and then do it.”

Snap declined to comment.

While Snap may make people rethink what it means to be prepared for a public offering and how high investors might value a buzzy company, it will most likely not discourage companies from going public altogether. Generally speaking, newly public companies have done well for investors over the past couple of years, so there is an appetite to buy into more of these start-ups.

“There’s a buildup of potential I.P.O.s,” said Scott Sandell, a venture capitalist at New Enterprise Associates.

Many start-ups also do not face the tough situation Snap is in now, in which it is being compared to a Goliath like Facebook, which is aggressively copying some of Snapchat’s features.

For many of the tech start-ups that are evaluating going public, Snap’s trajectory offers valuable lessons, said Elad Gil, the founder of the genetic testing start-up Color Genomics. The kind of public market beating that Snap just went through can ultimately help a company become more focused and disciplined, he said.

Just look at what happened with Facebook, Mr. Gil added. The social network’s stock, which was priced at $ 38 for its I.P.O., at one point went as low as $ 18 a share in its first year as a public company.

The investor skepticism helped Facebook concentrate on spreading into new areas, such as mobile advertising, where it has since become a juggernaut. On Thursday, Facebook’s stock closed at $ 150.04.

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