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What the upcoming Snapchat IPO can teach us about how to get rich

If you're reading the financial papers, you've most likely heard about the upcoming IPO of Snap, the parent company to the Snapchat app that is popular with younger generations.

If you don't know what Snapchat is exactly, here's a brief overview of its business model: You can take pictures or videos that disappear after a short time and send them to your contacts. They are at the front-end of a type of communication that is growing in popularity called ephemeral content, which simply means content that lasts for a short time.

Snapchat has added a number of services to their app over time, like the ability to draw over the pictures, transform yourself into things like a dog, and string together pictures to tell a story that lasts for 24 hours. It has used these services to attract brands to the app to tell their own stories. These companies pay a premium to have their stories promoted to users feeds.

If you're baffled to the appeal of this, it's because it's probably not for you. Of the over 200 million users, 37% are between the ages of 18 and 24 , and only 14% are over the age of 35. In fact, most older people can't even figure out how to use the app, which has a reputation for being difficult to use .

And yet, somehow, Snapchat has managed to turn this smart phone app into a business that is valued at potentially $25 billion dollars, and as The Wall Street Journal reports, "Snap's IPO is poised to be the largest U.S.-listed technology debut since Alibaba in 2014. "

But to me the question is why?

Getting ready to snap?

As the WSJ report, according to Snap's S-1 public filing, "Among the revelations, the five-year-old company posted revenue last year of $404.5 million, up nearly sevenfold from 2015, as advertisers flocked to its vast audience of 158 million daily users in the fourth quarter, which is concentrated in the coveted 18-to-34-year-old demographic. The company's net loss, meanwhile, expanded to $514.6 million as it spent heavily on everything from data storage to marketing and research."

Yes, you read that right. Snap lost around $114 million last year.

And then there's this chart from the same article:

Wall Street Journal reports revenue & user trends for Snapchat in 4th quarter of 2016

Wall Street Journal reports revenue & user trends for Snapchat in 4th quarter of 2016

Yes, you're seeing that right. As the company gears up for IPO, it's slowing in revenue growth and in user growth.

And according to another article by the WSJ , "Snap's slowdown in user growth coincided with rival Facebook's launch in August of Stories on Instagram-direct competition to a Snapchat feature which lets users create a series of videos and images that disappear after 24 hours. Five months after the launch, the new Instagram feature reached 150 million daily active users, Facebook Chief Executive Mark Zuckerberg said on an early February earnings call."

As much as Snap doesn't want the world to notice, this is a classic case of the markets getting enameled with a growth-model company. That is people are literally investing in big numbers, even if the those big numbers themselves don't actually tell the story of a financially strong company.

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The straw that snaps the camel's back

As early as March you will probably see the company go public, be valued between $20 to $25 billion dollars, and continue to invest in ways that inflate growth but not necessarily profitability.

But maybe you're asking yourself whether they can continue to do that as a public company. Aren't they accountable to shareholders?

The short answer to that is, "No."

As the WSJ reports:

Adding another potential risk for investors, they will have no formal say in how the company is run after the offering, which Snap said could raise as much as $3 billion.

Snap will issue nonvoting shares in the IPO, it said, confirming a prior Wall Street Journal report. The company described that as an unprecedented move in a U.S. IPO. It will enable the co-founders, Messrs. Spiegel and Murphy, to maintain a tight grip over the company. The two currently hold about 89% of the voting shares, according to the filing.

This, my friends, is the ultimate con. A company with no financial rigor raising over $3 billion from investors who have no say in how that money is spent. If you want to talk about handouts, that's about as clear as it gets.

And yet, most people will hand over their hard-earned money willingly and with a smile on their face, hoping that they're investing in the next big tech company.

There is another word for this. It's called gambling.

And while gambling is often fun and exciting, it's not a way to get rich.

Go on take the money and run

So who stands to win in all of this? The answer is same as it always is-the entrepreneurs who founded the company.

Snap's co-founders Evan Spiegel and Bobby Murphy each hold about $3.7 billion in stock, according to the company's own valuation-" an amount that could rise if the company prices its shares higher in the IPO."

That, my friends, is called making money out of thin air.

The new rules of money

Ultimately, Speigel and Murphy understand something that most of the "investors" who will buy their stock do not. The rules of money have changed. Like most rich people, they understand how to create money out of thin air. And at the end of the day, even if their company never grows as big as they think it will, they'll have managed to become billionaires.

I'm not saying whether it's right or wrong. All I'm saying is they understand how the game is played, and they've dominated. It's the epitome of New Rule of Money #8: Since money is becoming worth-less and less, learn to print your own.

And if you look at the four rules of investing from my wife Kim's book, "It's Rising Time!", it's a bad investment:

  • The investment must put money in my pocket
  • The investment must stand alone
  • I want to control the investment whenever possible
  • Every investment must have an exit strategy or exit options

Of these four rules of investing, Snap only meets one. You can exit, but you'll most likely do at a loss, just like Twitter investors have already found out.

How you can thrive in the new economy

The good news is you can learn to create your own money out of thin air-and you can do so while building and investing truly profitable companies that meet Kim's four rules of investing. But it takes financial intelligence.

For instance, we've talked a lot about real estate investing over the last couple months. While that won't skyrocket you to billionaire status while stealing the wealth of millions of investors, it does allow you to find properties that put money in your pocket each month, stand on their own, give you control, and have exit options-all four of the criteria that make a good investment.

Or you could build an online business selling products on, like our own Rich Dad VP of Business Development, Greg Arthur does. Each month, Greg creates money out of thin air with his business.

All you have to do is start. Kim's first investment property was a two-bedroom house in Portland, OR. Today, she owns thousands of apartments across the US. Greg started with white label products on Amazon and then learned how to work with manufacturers to sell his own products and become financially free.

You can do the same thing. All you have to do is start thinking like an entrepreneur-that is, by the new rules of money.

Original publish date: February 13, 2017

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