September 10, 2018 / 8:56 PM / 2 months ago

Breakingviews - Wall Street brains mostly stumped by tech dilemmas

The logo of messaging app Snapchat is seen at a booth at TechFair LA, a technology job fair, in Los Angeles, California, U.S., January 26, 2017. REUTERS/Lucy Nicholson

NEW YORK (Reuters Breakingviews) - Wall Street brains are mostly stumped by tech dilemmas. Giant opportunities and pay packages lured Imran Khan and other rainmakers to Silicon Valley. Their record is mixed at best at Snap, Alphabet and Twitter. Raising capital is easy, instilling discipline harder, and finding ways to beat dominant rivals nearly impossible.

It’s easy to see what Khan first saw in Snap. The social media network was growing absurdly fast among young people, and the firm granted him restricted stock worth an estimated $145 million in early 2015. The package offered the former tech analyst and banker a chance at nearly limitless riches should Snap become a huge success, and a substantial payday if it didn’t. The company also granted Khan an additional $100 million worth of equity just prior to its initial public offering in 2017.

Snap has since flailed. Daily active users declined in the last quarter. Analysts have significantly reduced their revenue projections over the past year and expect the firm to lose about $700 million this year.

Cash-burning Snap has been lucky to have a steady stream of backers, thanks in part to Khan. His experience guided the company to a smooth IPO, and his links, particularly to Asian tech firms, helped secure investments from Alibaba, Tencent and others. Khan’s plan to set up an investment firm to take stakes in tech firms, according to people familiar with his thinking, would take advantage of these strengths.

This fits the pattern of other high-profile Silicon Valley financial hires such as Twitter’s Anthony Noto and Alphabet’s Ruth Porat. Bankers understand how to talk to investors. They often struggle to restrain the rampant optimism of company founders. Twitter’s spending growth continued under Noto as the firm chased opportunity. Porat initially dampened Google’s capital expenditure by reining in fiber building and other expensive projects, but spending is now rising on cloud-based businesses.

The biggest factor driving the payoff from equity packages is growth. Ironically, that’s where former bankers have the least influence. Twitter and Snap were second rank social media platforms, and Google the dominant search engine, before tapping big Wall Street recruits. They still are. Rising tech firms looking for financial talent should keep this in mind – especially during pay negotiations.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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