Term Sheet — Friday, February 3

Basics: The ticker is NYSE: SNAP. The target raise is $3 billion.

Income: Snap is losing a ton of money, but revenue grew significantly last year. Snap brought in $404 million in 2016 and posted a net loss of $514 million. Compare that with 2015: $58 million in revenue and a net loss of $372 million. As Bloomberg’s Shira Ovide notes, Snap’s cost of revenue is higher than its actual revenue. At a reported $25 billion valuation, that’s a 62x price-to-sales ratio. (For comparison, Facebook’s ratio is 13x.)

Users: Snap has 158 million daily active users as of the fourth quarter of last year, and they’re hooked: They use the app an average of 18 times a day. It’s a story of compulsive usage.

But similar to Twitter in its IPO, Snap’s rate of growth is slowing. Users grew a respective 60% and 66% in the first two quarters of the year, but only 55% and 46% in the last two quarters.

Snap attributes the dropoff in user growth to “performance issues” from one of its product updates to Android phones and “increased competition” from companies that “launched products with similar functionality to ours.” Fixing the Android issue helped in December, the company says, but so did seasonal usage that won’t continue in future months.

In other words, Instagram Stories, which launched in August, is hurting Snapchat. After Mark Zuckerberg’s many failed attempts to copy Snapchat, he’s finally done it with Instagram Stories. If at first you don’t succeed, copy, copy again.

Rights: As expected, Snap isn’t giving shareholders a vote. The filing states that even if CEO Evan Spiegel or co-founder and CTO Robert Murphy get fired, they may be able to retain control of the company. Their total control is even listed as a risk factor. So is the fact that no other company has gone public with non-voting stock on a U.S. exchange. (Note: Facebook and Google’s dual-class stock structures allowed shareholders to vote, even if the votes were mostly meaningless against their founder’ preferred super-shares. Facebook has since created a third, non-voting class of shares.)

Ownership: Benchmark is the largest outside shareholder with 12.7% of the Class A stock. Lightspeed owns 8.3% of the Class A stock. Spiegel and co-founder Robert Murphy each own 21.8% of the Class A stock. Of Snap’s outside board members, (Michael Lynton, Joanna Coles, A.G. Lafley, Mitch Lasky, Scott Miller, Stanley Meresman and Christopher Young), Lasky, a partner with Benchmark, is the only venture capital investor.

Carrot: Spiegel gets an additional 3% of the company just for taking it public. As Peter Kafka of Recode notes, that’s a $750 million IPO bonus. The board granted that stock to him in 2015 “to motivate him to continue growing our business and improving our financial results.”

Risks: Snap has a robust section of risk factors. It’s twice as long as Facebook’s.

Competition: The self-described camera company considers its rivals to be Apple, Facebook, Instagram, WhatsApp, Google, YouTube and Twitter. In Asia: Kakao, Line, Naver, Snow and Tencent.

Narrative: The S-1 takes a conversational (dare I say millennial?) tone at times, explaining that, OMG, Snap didn't know how it would make money at first, but because “our server bills were getting expensive, “ the company “realized we needed to start monetizing—and fast.”  Later, the company describes its team as “kind,” as in, “the type of kindness that compels you to let someone know that they have something stuck in their teeth even though it’s a little awkward.”

Not a sexting app: “When we were just getting started, many people didn’t understand what Snapchat was and said it was just for sexting, even when we knew it was being used for so much more.”

Hard to use: Snapchat has a reputation for being confusing. Lots of people have tried the app and abandoned it, and it is really, really hard to get people to give an app a second chance. (Just ask Twitter!) But Snap doesn’t view that as a problem: “Just because products are sometimes confusing when they’re new doesn’t mean we are going to stop building innovative products for our community. Part of the joy of using Snapchat is discovering new features and learning how to use all of the products that we create.” (If any of you are still confused by the app, see the helpful diagram map on page 72.)

Other fun facts: Snap paid nearly $1 million to protect Spiegel last year and bought $650,000 worth of legal work from his dad’s law firm. Snap’s office arrangement could lead to people feeling isolated and quitting. This may be the first ever S-1 to use the words selfie, sexting, party goat and barf. The company will spend $400 million a year on Google Cloud services over the next five years, meaning Google might make more money from Snapchat than Snapchat does.  Snap paid $157.5 million to settle a lawsuit with its third co-founder.

Is it a buy? Investors I spoke with said yes. Not because they can tie the company’s performance to any sensible financial model, but because they have Facebook FOMO. “I’m willing to risk losing 50% if there’s a chance this is like Facebook and I can get 10x.” But they may have to stick around for the long haul: At its current expense base, investors estimate Snap would have to grow by around 12x to get to Facebook-style profit margins of around 40%.

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Business gears up for an immigration ban fight.

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…AND ELSEWHERE

Donald Trump is dominating earnings calls. Trump’s whims threaten stability, which is bad for business. A tricky period for M&A. New trends in getting mad online.

VENTURE DEALS

•MapAnything, a Charlotte, N.C.-based provider of geo-analytics and mapping services for Salesforce users, raised $33.1 million in Series B funding. Columbus Nova led the round, and was joined by ServiceNow Ventures, Greycroft Partners, Harbert Venture Partners, Salesforce Ventures, and individual investors.

•Wealthsimple, a Toronto-based provider of digital investment advisory services, raised C$20 million ($15.4 million) from Power Financial Corp, according to Reuters. Read more.

•Gastrofix, a German cloud-based POS service for the hospitality industry, raised €8 million ($8.6 million) in Series B funding from Radeberger Group, according to Tech.eu. Read more.

•Disruptor Beam, a Framingham, Mass.-based gaming company, raised $8.5 million in Series B funding. GrandBanks Capital and Romulus Capital led the round.

•LogicHub, a Mountain View, Calif.-based cybersecurity company, raised $8.4 million in Series A funding. Storm Ventures and Nexus Venture Partners led the round.

•SparkFund, a Washington, D.C.-based financial technology company, raised $7 million in Series B funding. Energy Impact Partners led the round, and was joined by Vision Ridge Partners, among others.

•Hutch, a U.K.-based developer of free-to-play mobile games, raised $5.5 million in Series A funding, according to TechCrunch. Index Ventures and Backed VC led the round. Read more.

•OptiRTC, a Boston-based provider of platforms for stormwater management, raised $5.5 million in funding. Ecosystem Integrity Fund led the round, and was joined by MissionPoint Partners, the Renewal Funds, the Massachusetts Clean Energy Center, and Geosyntec Consultants.

•Litify, a Brooklyn, N.Y.-based developer of software for law firms, raised $5 million in funding from Fortress Investment Group.

•Klipboard, a London-based developer of workflow management software, raised $1.1 million in seed funding.

•Airware, a San Francisco-based platform for developing and operating drones, raised an undisclosed amount in funding from Caterpillar Ventures, Caterpillar’s (NYSE:CAT) venture arm.

•LendingFront, a New York City-based platform for business lending, raised an undisclosed amount in funding from Las Olas Venture Capital.

HEALTH + LIFE SCIENCES DEALS

•Tarveda Therapeutics, a Watertown, Mass.-based clinical-stage biopharmaceutical company developing cancer therapies, raised $30 million in Series D funding. Versant Ventures led the round, and was joined by New Enterprise Associates, Novo A/S, NanoDimension, and Flagship Pioneering.

•Ceres Nanosciences, a Manassas, Va.-based life sciences company developing a diagnostic test for Lyme disease, raised $3 million in Series A funding, according to the Washington Business Journal. GreyBird Ventures led the round. Read more.

PRIVATE EQUITY DEALS

• Ampersand Capital Partners has invested in and recapitalized Corpus Medical, a Campbell, Calif.-based manufacturer of interventional medical devices, catheter-based delivery systems, and implants.

• The Vistria Group, Apollo Global Management, and other investors have closed their previously announced purchase of Apollo Education Group, the owner of for-profit colleges including the University of Phoenix, for $1.1 billion.

• Sports Direct International (LSE:SPD) is considering a bid for Eastern Outfitters, the parent company of retailers Bob’s Stores and Eastern Mountain Sports, according to a report by Reuters. Eastern Outfitters is owned by Versa Capital Management, which acquired the brand last year when Eastern Outfitter’s former owner, Vestis Retail Group, filed for bankruptcy. Read more.

OTHER DEALS

• Macy’s (NYSE:M) departing CEO Terry Lundgren is apparently fielding takeover bids for the struggling company, according to a report by the New York Post. Read more.

IPOS

EXITS

• Toutiao, a Chinese company that recommends news, videos, and products, has agreed to acquire Flipagram, a Rolling Hills Estates, Calif.-based app developer, for an undisclosed amount. Flipagram raised $70 million in a 2015 Series B round. Investors include Sequoia, Kleiner Perkins, and Index Ventures.

•Hewlett Packard Enterprise (NYSE: HPE) acquired Niara, a Sunnyvale, California-based security analytics company. Terms weren’t disclosed. Niara raised nearly $30 million in VC funding from investors including Venrock and Index Ventures.

• SoFi, a San Francisco-based financial startup that refinances student loans, acquired Zenbanx, a Redwood City, Calif.-based mobile banking company, according to The New York Times. Read more.

• APG|SGA (SWX:APGN) acquired Blinq, a Zurich-based dating app, for an undisclosed amount, according to TechCrunch. Blinq raised $1 million in seed funding from local angel investors. Read more.

• The Carlyle Group (NASDAQ: CG) acquired Golden Goose Deluxe Brand from Ergon Capital Partners. Financial terms weren’t disclosed, but a report by Bloomberg values the deal at about €400 million ($430.5 million). Read more.

• H.I.G. Capital sold Fibercore Limited, a U.K. manufacturer of optical fibers, to Humanetics Innovative Solutions, a Plymouth, Mich.-based manufacturer of crash test dummies backed by Golden Gate Capital. Terms weren’t disclosed.

FIRMS + FUNDS

• Scania, a Swedish subsidiary of Volkswagen (XTRA:VOW3) that makes heavy trucks and buses, has launched a venture arm, Scania Growth Capital.

PEOPLE

•Osage University Partners has promoted John Lee to principal.

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