What the Snap IPO means for LA

What the Snap IPO means for LA

Great article by my good friend Arteen Arabshahi of Fika Ventures.

Business Insider, 2/26/17 http://www.businessinsider.com/what-the-snap-ipo-means-for-la-2017-2

There has been a lot of speculation around Snap’s imminent IPO, whether the stock price will soar or fall, if the lack of voting power for the issued shares will make a difference, whether someone will come and buy them out even post-IPO, whether they’ll continue to innovate on their core social product or turn into a camera company — a Kodak for millennials of sorts — and dozens of other hypotheses ad nauseam.

I won’t dare to predict what the unpredictable mind of Evan Spiegel will produce, especially in the face of Facebook’s continued copycatting, though I am willing to discuss the potential of what a newly minted (hopefully successful), high-profile, and multi-billion dollar IPO means for LA’s tech community.

New early stage capital

First and foremost, the obvious. There’s going to be a lot more capital floating around.

Snap will produce a number of new, tech-savvy millionaires in a way that LA hasn’t experienced for a long time, if ever.

Snap will produce a number of new, tech-savvy millionaires in a way that LA hasn’t experienced for a long time, if ever.

This batch of entrepreneurial thinkers will be active in deploying their capital to newly formed startups and venture funds which will then further catalyze the early stage community here in LA. As many former angel investors have moved upstream and become VCs, it’s left a gap at the earliest stages for nascent LA companies. The pre-seed and angel community is not as vibrant in LA as it is in some of other major tech hubs, so having new early stage entrants with access to capital, an understanding of the tech industry, and a higher risk tolerance will be a valued addition.

Talent starting companies

As I wrote in 2015, one of the biggest things LA has been missing is a hyper active tentpole company where talent could go, learn, and move on. Snap will become that destination assuming they can continue to attract top quality individuals and grow them, becoming a catalyst of the multiplier effect that great talent creates in every community – more experience, more capabilities, more credibility, more confidence, more capital, and thus, more companies.

As is human nature, some of these newly minted wealthy individual will decide to coast, hang out on the beach, and enjoy life in SoCal. However, we will also see another portion of them leverage the gift of liquidity to take a bigger risk, leave their role at Snap, and plunge into starting their own company. Not only will the quantity be great, but also the magnitude will be greater given they are now capable of taking bigger risks and shooting for their next, even larger outcome.

Snapchat’s first office in Venice Beach. Glassdoor

Snapchat’s first office in Venice Beach. Glassdoor

 

Talent with “scaling” experience

Beyond the troves of new entrepreneurs who will come out of Snap, we will also have a new unique skill set that is still rare in LA: the ability to scale a company. These people may not leave Snap to chase their own ambitions, but rather to go into executive roles at LA’s many other rapidly growing startups. One thing LA is lacking still is a recurring history of companies going from Series B to growth or IPO, but now that Snap has done it, it has generated thousands of people who have been through that process.

So while new companies will be an exciting addition to an already-vibrant LA community, a less-discussed but equally valuable effect of this IPO is the number of talented individuals who will leave Snap to join other companies and help them scale, bringing along their expertise with them. This may help encourage our next Snap rather than our next acquihire.

Not so fast, it isn’t that easy

Even though these things are all likely to happen eventually, there are still some nuances to consider. As much as we want great talent to spin out of Snap and propel the entrepreneurial community, Snap wants great talent to stay and propel Snap, and they’ve taken great measures to ensure this.

First of all, Snap has in place a back-loaded vesting schedule, which means that employees only get their equity in 10%, 20%, 30%, and 40% increments (increasing year-over-year until the end of year four) versus the traditional one year cliff and three year vest. This alone means many of these newly wealthy individuals, most of whom joined in the last 12-18 months, are only newly wealthy if they actually stay through four years. Given Snap went from 600 employees to 1,900 employees in the last two years, this is not immaterial and will likely delay any major exodus a bit longer.

A recruiter for messaging app Snapchat talks to job seekers at a booth at TechFair LA, a technology job fair, in Los Angeles, California, U.S., January 26, 2017. REUTERS/Lucy Nicholson

A recruiter for messaging app Snapchat talks to job seekers at a booth at TechFair LA, a technology job fair, in Los Angeles, California, U.S., January 26, 2017. REUTERS/Lucy Nicholson

Secondly, Snap has a highly fragmented workforce where many divisions work in silos, usually not even sharing a building with other teams, and thus there is little overlap in strategic thinking. This will change over time as Snap begins to consolidate office space and hold all-hands meetings, but in the short term, there may still be some gaps in exposure to be filled before everyone is ready to start their own businesses.

Finally, since Snap is seemingly very top heavy in terms of influence, it is unclear who inside their many walls are key decision makers. As employees start to leave, this story will become more clear, but in the short term, it’s still tough to say who, aside from a few high-profile players including Evan himself, can claim credit for the growth and strategy of Snap’s success. This may impact former employees’ ability to spin out onto their own adventures.

While some are calling this LA’s “Google moment”, given Snap has ~1,900 employees compared to Google’s ~2,200 at time of IPO and Snap’s market cap is priced to be near Google’s $23B market cap at IPO, it is yet to be determined if Snap will impact Venice and LA in the same way Google did Mountain View. Given the stage at which these employees joined and how generous Google was with equity, I don’t expect Snap to produce quite so many millionaires, though in a smaller community like LA, it may not need to in order to generate just as impactful of an outcome.

On top of recent successful exits like Dollar Shave Club, Blackline Systems, and Riot Games, Snap is exponentially magnifying that LA can produce a company from (near) infancy to maturity. I for one commend Evan for not only having the guts (and the means) to outlast acquisition attempts, but also to take the company public during a time when so many tech-leaders are shy to do so. Regardless of degree of success, this liquidity and influx of talent are a huge win for LA and an accomplishment not to be undermined.

Snap’s IPO is in many ways symbolic of LA’s tech community at large: no longer the outsider, here to stay, and still with plenty of room to grow.

Arteen Arabshahi is a seed stage investor at Fika Ventures where he focuses on enterprise software, marketplace, and financial technology businesses. He can be found @arteeninLA.

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