Welcome to another round of Inside the Deal, this week we're covering Snapchat! We recently posted about the Snapchat Mafia, which raised $970 million, and today we're taking a look at Snap's early investors.
So how did Snap become the hottest media giant back in 2014 with 71 million Snapchat users?
Snapchat was founded by three friends – Evan Spiegel, Bobby Murphy, and Reggie Brown, all students at Stanford University.
After launching a functional beta version, they celebrated their achievement. However, an argument erupted regarding Reggie's perceived lack of commitment to Picaboo. They began to gather user feedback, but Evan was dissatisfied with Reggie's marketing efforts, which were failing to gain significant traction.
Evan decided to take charge and personally arranged a photo shoot for the App Store and website images. He also reached out to bloggers to generate buzz. At one point, Evan decided to file a patent application and assigned the task to Reggie. At that time, they had achieved a Day 7 retention rate of 60%.
However, things turned for the worse when Evan discovered that Reggie had listed his name before Evan's in the patent application. This discovery led to a heated argument, ultimately resulting in Evan and Bobby changing the passwords and locking Reggie out.
Evan and Bobby continued to work on attracting more users. However, they received a cease-and-desist letter from a photobook company called Picaboo, prompting them to change their app's name to Snapchat. This change was officially registered on September 26, 2011.
With the new name, Bobby decided to secure a job and work on Snapchat as a side project. By November 2011, they reached 1,000 Daily Active Users (DAUs) but still needed more traction to attract venture capital funding.
Evan initiated advertising activities, such as distributing flyers in malls and conducting small seminars. The app gained popularity among high school students in Los Angeles and Orange County, who used it for communication instead of texting. By early 2012, Snapchat had reached 20,000 DAUs, becoming a highly sought-after tool.
While Evan and Bobby were excited about the remarkable growth, they also faced rising server costs, with monthly expenses reaching $5,000. To support their viral growth, they decided to seek funding.
Sequoia Capital passed on the opportunity. It was only when Barry Eggers, a partner at Lightspeed Ventures, noticed his daughter and her friends using Snapchat that the tide turned.
Barry shared the app's popularity among teenagers with his fellow partners and managed to locate the founders. During their pitch, Evan stated their ambition to become "the camera for the world."
Snap's initial public offering (IPO) marked a significant financial success story for venture capital firms Benchmark and Lightspeed Venture Partners. Other participants in Snap's IPO included SV Angel, Mitchell Lasky, and General Catalyst.
After setting its IPO price at $17, Snap began trading at $24 per share, resulting in a market capitalization of approximately $33 billion, placing it in the top third of the S&P 500, alongside giants like Target and Marriott.
Benchmark, a company that had previously invested in public giants like Twitter and Uber, held more than 120 million shares of Snap, valued at over $2.9 billion at the opening market price. They initially invested $13.5 million at a valuation of $70 million in 2013, resulting in an extraordinary return on investment of over 220 times.
Lightspeed Venture Partners, the first outside investor in Snap, invested a mere $485,000 in a seed round in 2012 and continued to invest in subsequent rounds, amounting to a total investment of $8.1 million. Holding nearly 82 million shares worth just under $2 billion, they scheduled to sell 4.6 million shares for $79 million at the start of trading, achieving a remarkable return on investment of over 250 times.
General Catalyst, which participated in Snap's 2013 Series B funding round, also profited from the IPO, holding more than 10 million shares worth $243 million and scheduled to sell 572,904 shares worth $9.7 million.
Angel investing firm SV Angel retained a stake worth $57.5 million at the opening price.
Institutional Venture Partners led a $60 million funding round in 2013 at an $800 million valuation, and Coatue Management led a $54.5 million funding round in 2014 at a $2 billion valuation.
It's worth noting that insiders were restricted from selling stock during the lock-up period, which extended for five months after the IPO, during which time tech companies often experience volatility. Facebook, for instance, initially traded lower before bouncing back after its IPO.
Brian Acton convinced his former Yahoo! friends to invest in his startup and it paid off big time. There are many other examples of early investors getting big returns by investing in their network of friends, colleagues, founders, etc.
Use PIN to empower your network to invest together in the best startups. Learn more here.