Snap Inc has admitted it faces a challenge in convincing advertisers of the veracity of its ad business as it files for a $3bn (£2.4bn) IPO that could be one of the largest by a tech firm in years.
In its filing, Snapchat’s owner says advertising accounted for 98% and 96% of its total revenue in 2015 and 2016 respectively. While it has attempted to reduce that reliance, other revenue streams – such as the product launch of spectacles – are yet to gain any significant traction.
The company also points to a lack of long-term advertising commitments and the fact that many advertisers spend a relatively small proportion of their overall budgets on advertising with Snapchat.
“Although we have recently tried to establish longer-term advertising commitments with advertisers, most advertisers do not have long-term advertising commitments with us, and our efforts to establish long-term commitments may not succeed,” says the filing.
“While no single advertiser or content partner accounts for more than 10% of our revenue, many of our advertisers only recently started working with us and spend a relatively small portion of their overall advertising budget with us. In addition, advertisers may view some of our products as experimental and unproven.”
The filing also reveals delicate details of Snap Inc’s business for the first time, reiterating that it is still in the early stages of making money from its rapid growth. Revenues last year came in at $404.5m (£324m), up from $58.7m (£47m) in 2015, a near sevenfold increase.
Daily active users are also growing rapidly, up by 48% year on year to 158 million. However, its net loss widened to $514.6m (£412.2m), from $372.9m (£298.7m) in 2015.
Advertisers may view some of our products as experimental and unproven.
Snap Inc has made a number of attempts to boost its business model in recent weeks. It has opened up access to its API to third parties, making it easier for advertisers to buy inventory without having to deal directly with Snapchat.
It is also introducing new formats and offering new tools to measure effectiveness, for example by working with Moat and Millward Brown. However, it faces a challenge in convincing marketers to move budgets from Google and Facebook, which together account for around two-thirds of digital ad spend in the UK and US. Facebook’s Instagram service is also a threat given its attempts to replicate many of the features found in Snapchat.
The $3bn IPO could value Snap Inc at between $20bn (£16bn) and $25bn (£20bn), according to reports. That would make it the one of the biggest tech IPOs in recent times and the largest valuation since Facebook.