Snapchat is on track to hold the biggest-ever initial public offering of stock for a Los Angeles company, yet none of the region’s major start-up investors stand to profit.
Of the nearly $3 billion that Snap Inc. has raised from investors for technology and hiring ahead of next month’s expected IPO, almost none of it has come from Los Angeles financiers.
The county’s leading venture capital firms — the investors that technology entrepreneurs often turn to for money and advice — knew the photo-messaging app had become a hit among teenagers. But for a variety of reasons, they passed on financially supporting the company.
Between Snapchat’s founding at Stanford University in the spring of 2011 and its rise to the global stage in 2013, Los Angeles firms had a short window to get a sizable piece of the company.
At Upfront Ventures, the largest start-up investor based in Los Angeles, associate James Bailey urged managing partner Mark Suster to take a meeting with Snapchat. But Suster dismissed the app as tool for sexting and furthering marital infidelity.
CrossCut Ventures and Clearstone Venture Partners didn’t have enough free cash to make a bet on Snapchat. For many firms including Baroda Ventures, CT Ventures and Rustic Canyon Partners, a chat app with no business plan in sight didn’t fit the profile of a company they'd back.
“We did not see the real revenue potential back then,” CT’s Alex Suh said.
The missed opportunities don't amount to a damning indictment of the region’s ability to spot world-changing start-ups. If anything, they illustrate how much of an anomaly Snapchat maker Snap Inc. is by technology industry standards.
But the lack of local representation means that hundreds of millions of dollars in possible investment profits, as early shareholders now become free to sell their holdings, will instead flow through Silicon Valley, bolstering the region’s booming start-up scene.
“You’d have to be an idiot to say I’m not bummed, but we’re very positive on the emergence of Snapchat,” Suster said.
Stanford University fraternity brothers Evan Spiegel and Bobby Murphy began working while students there on what would become one of the world’s most used photo-and-video-sharing apps.
The university has long bred start-ups and connected students to the tech industry. Spiegel and Murphy took advantage. One of Spiegel’s classes introduced him to top industry leaders, including Alphabet’s Eric Schmidt. And Murphy worked at a San Francisco start-up during the early days of Snapchat.
In 2013, the pair planted corporate headquarters in Los Angeles, where Spiegel grew up and saw potential for Snapchat to benefit from its cultural diversity and Hollywood connections. But their acquaintances and roots remained in the San Francisco Bay Area, said William Quigley, a managing partner at Clearstone.
The ties included the company’s first funding — a nearly $500,000 check from Silicon Valley shop Lightspeed Venture Partners that valued Snapchat at about $4 million. Lightspeed partner Barry Eggers had heard that the app was taking off in Southern California high schools (Spiegel’s young cousin in Orange County had been among early promoters).
Eggers shared the tip with his colleague Jeremy Liew, who tried repeatedly to get in touch with Spiegel before sending a Facebook message and getting a quick reply. Spiegel responded in part because Liew’s profile picture with President Obama made him seem legitimate. Needing cash to expand the company to keep up with huge usage growth, Spiegel accepted Lightspeed's investment.
As part of the IPO, Lightspeed could generate a 5,000-fold return on its initial investment. A 20-times return is enough to be considered a success.
Snapchat wanted more money at the end of 2012, and Liew and other Bay Area connections had already made the start-up the talk of the town despite its base in Los Angeles.
“They had the luxury of picking who they wanted to work with,” said Peter Lee, managing partner at Baroda Ventures.
Spiegel also held a “a relatively dim view of Los Angeles venture capitalists’ ability to understand the opportunity and advise on tactical choices,” said Bailey, now managing partner of Velos Partners. “Right or wrong, he felt they were out of touch on social and mobile platforms.”
Silicon Valley venture capital firms held stronger reputations, longer track records and deeper pockets, now with several $1-billion funds compared to L.A.’s none.
“Los Angeles firms couldn’t compete in that realm,” Lee said.
CrossCut Ventures was managing about $5 million, a pittance compared with the $425-million fund of Benchmark, Snap’s eventual investor in its early 2013 financing. CrossCut was telling potential investors in its fund that there would be a big company in Los Angeles someday, not realizing it would be the one already down the street, managing partner Rick Smith said. But he’s among those who say Snap is an aberration because of its move from Stanford, the timing and its unique service.
Clearstone’s Quigley knew that the Snapchat investment would be expensive and didn’t try to get a meeting with the company.
Mark Suster of Upfront Ventures was among those who had doubts about Snapchat and didn't try to invest in the young in 2013. Allen J. Schaben / Los Angeles Times Mark Suster of Upfront Ventures was among those who had doubts about Snapchat and didn't try to invest in the young in 2013. Mark Suster of Upfront Ventures was among those who had doubts about Snapchat and didn't try to invest in the young in 2013. (Allen J. Schaben / Los Angeles Times)
At Upfront, Bailey saw his two brothers — one of whom was in Spiegel’s Stanford fraternity — open the app 15 times a day during vacation. Bailey told Suster of the rabid usage and Snapchat’s key differences from Facebook.
But Suster felt troubled about backing a company associated with sexting, since the self-destructing messaging app first gained attention as a way to more securely send nude photos. In the back of his mind was a pitch he’d recently heard from TigerText, a disappearing text-messaging app he said was named after golfer Tiger Woods, whose philandering had been documented in raunchy texts.
Though people still use Snapchat for those reasons, the company added photo editing and entertainment features that turned the app into much more than a sexting service.
“I thought Snapchat was picture-based TigerText,” Suster said. “I wrote it off and didn’t take it seriously. But I don’t feel too badly about it. It was just a wrong judgment call.”
Snap declined to comment for this story.
Other Los Angeles investors passed because their aversion to “a moonshot mentality” encourages safer investments, said David Siemer, managing partner at Santa Monica investment group Wavemaker Partners.
“You will miss a Snapchat but you will also miss a whole bunch of zeroes," he said, referring to exciting start-ups that flame out and don’t produce profits for investors. “It would be very unlikely that we invested in a company that needs $100 million to get to one penny of revenue.”
Silicon Valley funds with more cash to spend and powerful industry relationships can afford a different mentality.