I consider Snap to be the most interesting IPO of this year because of how fast it is growing and the potential $25 billion valuation it may receive. Snapchat is an app that teenagers and 20 somethings love, but transitioning to a real business is tough. The app which was known as a flirting device is now seeking hundreds of millions in ad-dollars from top agencies. Looking at Twitter as a comparison to see how it can avoid making the same mistakes, it’s tough to say whether the monetization was the problem or the user growth was the problem. Lack of monetization hurts the stock which hurt the ability to retain top talent. However, Twitter’s stock plummeted because it failed to meet user growth expectations. It’s tough to increase the ad-load when the user growth is already slowing. Regardless of whichever problem claim first, I would say Snap wants to avoid slowing user growth/engagement and reach profitability quicker.

Snap has many hurdles it needs to overcome to reach profitability. The biggest hurdle it faces is gaining user targeting. Facebook’s greatest strength is that it knows who to serve ads to. This allows advertisers to get the most bang for their buck. While it has had some mess-ups with data analytics, it’s still the king of the space. Because Facebook has gathered information on your age, gender, likes, and place of residence, it can pinpoint exactly what you may be interested in purchasing. There may not be another company which knows more about people than Facebook. Snapchat doesn’t have to become the next Facebook to have a successful IPO, but it can’t turn into Twitter. Twitter has no knowledge of its logged-out users, so they monetize at a very low rate. Twitter only knows what tweets you view and engage with and who you follow. Snapchat is going to run into the same problem because you don’t have to fill out a detailed profile page and tell Snapchat what you like. Snapchat may have to do this, but without enraging its users by changing core features.

The one advantage Snapchat has is its engagement with content. Brands report showing special websites in their stories and measuring a high amount of traffic from users searching for it. This won’t be enough for Snapchat if it wants to be success in the long run. This is why last year Snapchat launched three new targeting initiatives. Prior to this it only had information on users’ age and gender. Snap Audience Match is the first one. It anonymously matches Snap’s consumer data with advertisers’ email lists and mobile ID lists to target ads to the proper users. Secondly, Snapchat Lifestyles Categories lets brands serve ads to users who view certain types of videos. Finally, Snap has a product called Lookalikes which is Snap helping brands service ads to users who act like a brand’s customers. These products are a step in the right direction, but it will take innovation and possibly changing the product to create more in depth profiles, to become more like Facebook and less like Twitter.

Snap also needs to create a web portal where users can click on a link and it brings them to purchase options. Increased visibility is great, but sales need to be driven. This needs to be created before it comes out with metrics because it’s the only way the metrics will be high enough to show spending on the app is worthy of premium priced ad dollars. As of now, Snap is working with Oracle Data Cloud. It helps marketers use information from offline purchases to target users on Snapchat. It also helps firms measure whether Snapchat ads lead to real-world sales. The fact that Snap needs a third party to help customers see if the advertisement worked is disconcerting. Snap needs to make the buying process as easy as possible. As I said, as web buying portal needs to be created like what Instagram has. Snapchat used to be an app for users to share their lives and communicate, but now it needs to be an app which makes buying products you seen in ads, simply and easy.

Snap is doing two things to get ready for the IPO. Firstly, it’s cracking down on the racy content in the Discover tab. It doesn’t want to show sensitive content such as profanity, over sexualized content, and violence. This has been Snapchat’s bread and butter, so becoming advertiser friendly could impact user engagement. Advertisers can’t see what users are posting on their stories, so the bright side is censorship of content likely won’t happen like the way it’s happening on Twitter. Twitter’s public nature makes it need to censor to bring in advertisers and to prevent a mob of users from causing damage.

The second thing Snap is doing is it is trying to do to make itself look great for its IPO is get ad commitments from media buying arms for 2017 which are double and triple what they spent last year. These commitments range from $100 to $200 million each. They aren’t guarantees, but they’ll help Snap look like it has a stable growth path forward. To get a high PEG, Snap will have to show it has business visibility. This will be tough because of the hurdles I described earlier. To get commitments for 2017, Snap is offering discounts on ad rates, access to new products, and help with creating ads which are tailored to Snapchat. This will make the 2017 numbers look good, but could cause a deflation of the bubble in 2018 if the advertisers don’t maintain their spending at normal rates.

Conclusion

Snap is experiencing growing pains as it attempts to do its IPO. Snapchat is growing fast, but it won’t get the $25 billion valuation it desires from just having eyeballs. It needs to show how it provides value to advertisers so investors can see how this is a sustainable business. Older investors think this is a kids’ app which is a fad, so Snap will need to be like all other IPO’s. It won’t get a free pass because of its popularity.