Can Snapchat's culture of secrecy survive an IPO?

Snapchat CEO Evan Spiegel and his executives will need to prove that the excitement over Snap can last long after listing day. Photo / AP

Last September, Snapchat employees read a report about a leaked commercial touting a new product-a pair of glasses for shooting videos. They felt emboldened to ask their bosses: Are these Spectacles glasses really from us? It seemed plausible. Paparazzi had photographed Chief Executive Officer Evan Spiegel wearing similar frames months earlier.

But after the inquiries, employees got an e-mail, clamping down on the chatter, according to people familiar with the matter. You may have seen reports about a product that we may or may not be working on, it said. Don't talk about it.

Hours later, Snapchat publicly announced that the glasses were indeed real and part of a new strategy to define itself as a "camera company." The company's new name was Snap Inc. Many employees read about this for the first time in the news.

That's the way things work at Snap, an ultra-secretive organization where employees are unlikely to know the goals or strategy of other teams. The only person who knows the full picture of the company's next steps is Spiegel, whose prickly opinions about privacy have propelled Snap's trajectory-and its product, an app for sending disappearing messages. "Keeping secrets gives you space to change your mind, until you're really sure that you're right," he wrote in a 2015 note to employees.

Those values will be tested in a planned March initial public offering, when Spiegel will take to the ultimate public stage to convince potential investors that the company has a long-term vision for growth, with a real plan to make more money and outmaneuver the competition. In an IPO, beyond providing financials, executives travel the country and internationally for a roadshow to explain their strategy.

Scrutiny has already caused pain. After Bloomberg News revealed specifics about Snap's offering size and target market valuation of at least $25 billion, Snap executives scolded the IPO's underwriters, assuming the bankers were responsible for the leaks, according to people familiar with the matter. Snap management threatened to cut some underwriters' fees if confidential information continued to appear in the news without the company's blessing, said the people, who declined to be named because they were not authorized to speak. Fees contingent on strict confidentiality is an unusual requirement, even in the hush-hush process of going public. A representative for Snap declined to comment, as did representatives for the lead underwriters, Morgan Stanley and Goldman Sachs Group Inc.

Snap executives have been reluctant to release any details they aren't legally required to divulge, even to their earliest private investors. Wall Street analysts say they are getting frequent phone calls from their clients, asking for any introductions to management or detail about what's in Snap's proxy filing, which was filed confidentially under the Jumpstart Our Business Startups (JOBS) Act.

"Everyone's kind of flying blind on this," said James Cakmak, an analyst with Monness, Crespi, Hardt & Co.

Investors who buy into public offerings know it's riskier to bet on a company with a shorter financial history. That's why the IPO process is so critical: It's the coming-out party when the company unveils why it's worth owning the stock. Potential investors will come to Snapchat with more skepticism. The last major social media debut, Twitter Inc., generated a lot of excitement on Wall Street, but the company's later performance proved that a popular, influential product doesn't necessarily indicate long-term revenue and user growth.

"Investors learned their lesson with Twitter," said Rett Wallace, CEO at Triton Research Inc., which analyzes Silicon Valley companies preparing IPOs. "They now know what metrics to ask about."

But if Snap won't explain clearly how it sees its future, investors will be left to judge whether they trust Spiegel.

From broad strategy down to the shape of buttons, Spiegel has the final say on Snap's moves and will have the majority of the voting control, along with co-founder and Chief Technology Officer Bobby Murphy, after the offering. The company doesn't rely heavily on data to make its decisions, and Spiegel isn't a fan of hiring product managers who do user testing to figure out what will work, said employees, who declined to be identified because they were not authorized to speak.

Even Snap's offices assist in discretion. Employees describe a siloed company, scattered among the buildings in Venice, California, instead of in a main corporate campus. Snap also doesn't hold all-hands meetings to explain strategy-a staple of employee life for its Silicon Valley peers. Spiegel communicates with his executives primarily via Snap messages, which vanish after they're read.

During a 2014 visit to the company's headquarters, Bloomberg reporters weren't allowed past security desks; instead, they walked and talked with Spiegel on the Santa Monica beach boardwalk. Off the record. And violating Spiegel's restrictions can have consequences. One day in 2015, a Bloomberg reporter called to confirm what sources said about an executive hire. The executive's offer was quickly rescinded.

At the company's recent New Year's party, employees were instructed not to use their phones, according to people familiar with the matter.

Of course, there's a difference between secrecy around product and secrecy around a business model. Product discretion has been successful for Apple Inc., among others. Under Steve Jobs in 2010, employees testing the iPad ahead of its release had to keep the device tethered to a fixed object in a quarantined room with blacked-out windows and key-card locks, people familiar with the matter said at the time. The reasoning, for Apple and for Snap, is to surprise the consumer.

For Spectacles, it worked: People lined up for hours to have a chance to buy the $130 device, which resold for upwards of $1,000 on EBay during the first week it was available. The company didn't let any journalists review the product.

Spiegel is also paranoid about copycats. In October, Facebook added Snapchat-like effects to the camera on its app, the latest in a string of Facebook features that imitate Spiegel's company. "I wonder if there are more people at Facebook working on Snapchat than at Snapchat," venture capitalist Josh Elman tweeted. Instagram's version of Snapchat's stories feature, also called stories, recently reached 150 million daily users-the same number Snapchat gives for its global audience.

With the company name change and a rare interview in WSJ. Magazine in September, Spiegel made an effort to explain what Snap does: It's a camera company, giving people the power to express themselves and live in the moment, he said. While vague, it's a step closer to the broad descriptions competitors give for their purpose. Facebook says its mission is connecting everyone, while Google's is to organize the world's information. But Spiegel isn't running a profitable cash machine-and discerning investors will want to see a mature leader capable of operating a company with disclosure responsibilities.

"There's still the question of whether this is a long-term sustainable model," said Jay Ritter, professor of finance at the University of Florida. "What's the story for how this can be a multibillion-dollar revenue company five years down the road?"

Spiegel and his executives will need to prove that the excitement over Snap can last long after listing day. Cakmak, the analyst with Monness, Crespi, Hardt & Co., said that until the filing is public, analysis is premature. But once the numbers are out, the demand for transparency will depend on their growth. "Transparency isn't an issue-until it is. And it's an issue if they're not making as much money as everyone thinks they are."