Snapchat has filed for IPO a few days ago for an expected total valuation of $25B dollars. A total that is far away from the $104B for Facebook and Alibaba ($167B), yet one of the major operations for the “startup” world. As always in such a case, we all dive into the prospectus to have a look into the real numbers they are sharing with the general public. But what are the key numbers that should be telling us whether Snap (new company name) can really grow as fast as the investors are expecting? And eventually, is the market able to sustain the company growth?

Let’s quickly review the basics of a startup: CAC (customer acquisition cost), Churn rate, and ARPU (Average Revenue Per User). The other KPIs? useful but not in the case of a company that has no equivalent, moreover we won’t be going into details to keep it simple. The filing prospectus doesn’t provide us with the churn rate but we have the ARPU for Q4’2016 that is $1,05 (for context Facebook’s ARPU is $3,82 for Q2’16). Yet, the ARPU and its evolution doesn’t mean much since everything around is moving. The last KPI is Snap’s CAC for:
(1) 2015: yearly $0,76 when $0,97 for Q1’15
(2) 2016: yearly $2,44 when $4,4 for Q4’16

This means the growth of the user base is coming at a rising price. Moreover, the user base isn’t growing exponentially (average of 3,63M users/ month for 2015 and 2016 cumulated, ranging from 2,3M to 6,7M/ month) and even slowing down to 2,3M users during Q4’16 (equivalent of Q1’15). The last quarter has been impacted by the competition from Facebook and Instagram that has made a “me-too” of its technology.

That last information provides the foundations of some risks that may also be the reason why the company is going for an IPO: Snap needs to pour a lot of cash to continue innovating. Without that innovation, there won’t be any acquisition of customers at low cost and the situation of Q4 may become a bad habit, or get even worse since Facebook will not let the new kid in town get all its younger users without a battle. And Facebook has proven to be really agile in implementing a copy-cat of Snap features in Instagram. Features aside, Facebook will be also a challenging competitor on the revenue side since they both are competing for the same cash coming from the advertising industry.

Indeed, according to WSJ, Snap is trying to close ad spending commitment deals with the Big 4 of the advertising (IPG, Omnicom, WPP, Publicis). A good initiative but it may become a dog fight since Facebook is already deeply connected to those 4 majors and has proven them it can create the same environment (features) for the brands and provide 500M daily average users when Snap can only provide with 160M. A classic David vs. Goliath case that will cost a lot to Snap since they need to close those deals to continue growing. But, as we have already seen, it will not be that easy for Facebook to keep on the fight since we don’t have any idea how the users will behave.