Snap and the IPO gamble

Sports gambling is illegal in almost every state, and even the states where it is legal, it is highly regulated. For many, sports gambling is seen as a predatory evil that preys on the weak-willed and hurts society as a whole; others view betting on sports as a way to heighten the stakes of entertainment or possibly even make a living from a specialized knowledge set. For those with no stake in the argument, it can be seen as an odd discussion. Why is gambling on sports illegal, and yet the stock market exists?

You might not have looked at it this way before, but the stock market is basically legalized sports gambling. Traders pick a team they like, feel they have some insight into their fortunes, and place a bet on whether that team will succeed or falter. The capitalist viewpoint is that trading stocks isn’t gambling because buying a stock is making an active investment in a business (i.e. “team”) thereby supporting their cause. That’s a value positive spin on it, but, truthfully, your stock purchase has little to do with a business’ success or failure and more to do with lining your pockets with riches. This is exactly the reason all tech startups and their investors pine for the day they can enter the stock exchange, better known as taking a company public.

Despite what some might tell you, no one gambles on sports for anything other than to try to make a few bucks, and no one buys or sells stock as a sign of faith but to make mega bucks. In much of the tech world, entering the stock market and releasing an initial public offering, or IPO, is this big payoff. It’s also the ultimate gamble.

Twitter, Facebook, LinkedIn, Snap Inc. (Snapchat) — none of these businesses were profitable before they entered the stock market. But from their startup inception to their IPOs, their not-so-secret marketing ploy is one day they’ll go public and all investors and employees will get disgustingly rich.

It’s a major conundrum of tech economics; when your company produces no tangible goods and sells nothing but a “sense of place,” what is your value? So many of the modern public companies offer free services that have attracted hundreds of millions of users with advertising as their only profit engine. As of early August, Snap has only been a publicly traded company for five months. In that time, its stock price has slid like few imagined. It doesn’t matter that teenagers and twenty-somethings love your service when they’re not generating you revenue.

What Snap failed to realize is technology is a dog-eat-dog market, and any service is replicable. Over the course of the last few years, Facebook created not only a popular Snapchat clone in WhatsApp, it also cloned every feature the company offers. No matter how fun Snapchat is, Facebook is truly ubiquitous, and users don’t need to leave to find Snap-like functionality.

Snap’s stock decline has troubled the waters for many tech firms eager to test the IPO waters. Uber, Dropbox and AirBnB have all backed away from the public ledge. Snap is a few short months away from being in Twitter land, where rioting stockholders force it to make poor decisions and hurt its overall product. Going public makes a company vulnerable to competitors and opens it to market demands of rapid, untested evolution.

The sad truth is that most startups don’t have a choice and ultimately must enter the stock market. Ready or not, investors want to strike when the iron is hot. For Snap, it was probably hottest last summer. Without new innovations to fan the flames, we’re all seeing its rapid cool down. ♦

Patrick Boberg is a central Iowa creative media specialist. Follow him on Twitter@PatBoBomb.