The Courtship, The Secret Meetings, The $19 Billion Poker Game
The subject line of the e-mail was like every other come-on that hit Jan Koum’s in-box in the spring of 2012. He was pounded daily by investors who wanted a piece of his company, WhatsApp. Hatched on his birthday, Feb. 24, 2009, WhatsApp was emerging as a global phenomenon. Some 90 million people were using it to text and send photos for free. No social utility had ever grown as fast. Facebook had only 60 million by its third birthday. And at the time close to half of WhatsApp users were returning daily.
Koum looked at the e-mail sender: Mark Zuckerberg. Now, that was a first. The Facebook founder had been using WhatsApp and wanted him over for dinner. Koum stalled, then finally wrote back saying he was traveling soon and dealing with server issues. Zuckerberg suggested they meet before Koum left. Koum forwarded the reply to his cofounder, Brian Acton, and his sole venture backer, Jim Goetz, a partner at Sequoia Capital, adding the word: “Persistent!”
Take the meeting, Acton said: “When someone of Mark’s status contacts you directly, you answer the phone.” Koum had lunch with Zuckerberg later that month at Esther’s German Bakery, chosen for its discreet back patio and location 20 miles away from Facebook’s campus. Over their meal Zuckerberg said he admired what Koum had built and hinted at his interest in combining their two firms.
So began the most lucrative two-year courtship in technology history, one in which admiration led to friendship and then, in a last-minute hurry, to an unprecedented transfer of wealth, all signed and sealed on the door of the welfare office Koum, 38, once haunted. Last month Facebook bought WhatsApp for $4 billion in cash, $12 billion in stock (8.5% of the company) plus $3 billion in restricted shares.
The deal cements Zuckerberg as tech’s new billionaire-maker. Koum, a shy but brilliant engineer who moved from Ukraine to the U.S. with nothing, will join the Facebook board and, after taxes, pocket $6.8 billion.
His cofounder, Brian Acton, a mild-mannered 42-year-old ex-Yahoo engineer who got turned down for jobs at Twitter and Facebook, will come away with $3 billion after tax. The deal, he says, has left him “astonished.” Sequoia Capital, the only venture firm to taste a part of this deal, walks away with $3.5 billion–a 60-fold return on its $58 million investment.
The numbers are crazy for a company with only 56 employees and roughly $20 million in revenue, but it made sense for Facebook. WhatsApp, which doesn’t even have a sign on the door of its headquarters in Mountain View, is one of the world’s most commonly used communication utilities after e-mail and the telephone and will introduce voice calling later this year.
Its 470 million users have already erased $33 billion in SMS revenue from wireless carriers that got rich and fat charging per text. WhatsApp charges nothing for the first year and then asks you to pay $1 a year thereafter. No ads, no stickers, no premium upgrades. In later discussions Zuckerberg promised the WhatsApp founders “zero pressure” to make money, saying, “I would love for you guys to connect 4 to 5 billion people in the next five years.”
WhatsApp could eventually make Zuck a lot of money. It costs WhatsApp five cents to support each user, and it’s charging customers in only a handful of countries, like the U.S. and Britain, where mobile payments are relatively mature. WhatsApp believes $1 billion in annual revenue is within reach by 2017 as the service grows and billing falls into place. Insiders say the app could also start charging airlines or companies like Uber for the right to send messages to WhatsApp users with their permission.
The big risk, as always, is a mass exodus of users to the next new thing. That doesn’t seem likely right now. WhatsApp, Acton confirms, has been signing up a million new users per day since Dec. 1, 2013.
Pretty much everyone in Hong Kong with a smartphone uses WhatsApp. In United Arab Emirates you can watch WhatsApp Academy on TV. In the Netherlands, where 9.5 million people (more than half the population) actively use it, “Whatsappen” is now a verb in the Dutch dictionary, meaning to send a WhatsApp message. Brazil’s professional soccer players use its group-chat feature to organize labor strikes during games.
“Sometime in the not too distant future,” says Sequoia’s Goetz, “WhatsApp is likely to eclipse all SMS traffic across the globe.” (Perhaps it’s no surprise that Zuckerberg reportedly held a private meeting with 20 telecom executives last week to ease their fears of being buried by free web-based services like Facebook and WhatsApp.)
Back in 2012, before all the craziness, Koum had time to mull over his lunch with Zuckerberg. He and Acton had $8 million from Sequoia and wanted nothing more than their independence. They rarely went to Silicon Valley networking events and didn’t entertain bid offers. So Facebook’s overtures from then on never turned into bids on paper. Zuckerberg and Koum instead became friends, meeting once a month or so for dinner.
For the next year WhatsApp focused on its march past 300 million users. In June mid-2013 the founders happened to meet Sundar Pichai, who oversees Android and Chrome at Google. They talked about their love of clean and simple digital products. At some point around early 2014 Pichai decided it would be good for Koum and Acton to meet his CEO, Larry Page. They agreed to meet on Tuesday, Feb. 11.
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On the Friday before that meeting a WhatsApp staffer ran into Facebook’s head of business development, Amin Zoufonoun, and told him that Koum was meeting with Page imminently. Zoufonoun, who helped broker Facebook’s $1 billion Instagram acquisition in April 2012, went back to his company and set the wheels in motion to accelerate an acquisition offer that had already been in the works for some time.
Zuckerberg got Koum over to his house Monday night and finally floated the idea of an acquisition that would leave WhatsApp independent and crucially, make Koum a board member of Facebook. “It was a partnership, where I would help him make decisions about the company,” Koum recalls. “The combination of everything that was discussed is what made it very interesting for us.”
The next day Koum and Acton drove to Google’s Mountain View headquarters and met with Page and Pichai in one of the company’s gleaming conference rooms. They talked for an hour about the world of mobile and WhatsApp’s goals. “It was a pleasant conversation,” says Koum. Page, he adds, is “a smart guy.”
When asked if he got the impression Page was interested in buying WhatsApp, Koum pauses. “No,” he says. Maybe there was a hint? “Maybe I’m not good at reading him.”
If Page had been interested in buying WhatsApp as some reports have recently suggested, the meeting might have been too little too late. Things had already been set in motion at Menlo Park, and at WhatsApp the founders and their advisors were calculating how much they could conceivably ask for in deal talks. One source close to the company says WhatsApp’s founders were more interested in independence than money, but another says they also believed themselves to be worth at least $20 billion, a number calculated by looking at the market capitalization of Twitter (currently $30 billion), WhatsApp’s global user base and the company’s future plans for monetization.
On Thursday Koum and Acton went to Zuckerberg’s house for dinner at 7 p.m., where Acton met Zuckerberg for the first time.
“One day I want you to become bigger than us in number of users,” Zuckerberg told them. “What you guys do is a much more common-use case.” Zuckerberg said he wanted them to keep doing what they were doing but with the might of Facebook’s legal, financial and engineering resources.
At 9 p.m. Acton went home to tend to his young family. Koum and Zuckerberg played high-stakes poker: One source says that Zuckerberg offered a range of $15 billion and higher, and that Koum said he was looking for something closer to $20 billion. Facebook’s founder asked for some time.
The following day, Friday, Feb. 14, Koum and Acton posed for a photo shoot with FORBES at their Mountain View office. When the photographer left at 6:30 p.m., Koum got in his Porsche and stopped at Zuckerberg’s house for another meeting. Koum denies a report that he interrupted the Zuckerbergs’ Valentine’s Day meal. “It wasn’t like there was dinner and candlelight and I barged in through the door.”
Until then he had tended to leave the Zuckerbergs’ house when Mark’s wife, Priscilla Chan, came home from work. Over snacks Koum and Zuckerberg hammered out the final details of the partnership and WhatsApp’s all-important independence under Facebook, but the two weren’t yet in agreement.
Finally, on Saturday night Koum and Zuckerberg went from talking in the kitchen to the living room couch, before Zuckerberg offered $19 billion as well as deal terms that Koum liked. It was “something we can probably do on our end,” Koum replied.
Koum waited for Zuckerberg to leave the room and got on the phone to Acton, who was at home. It was around 9 p.m. “I just want to check if you’ve made a decision either way,” Koum said, giving his friend the finalized details. “Do you want to move forward?”
“I like Mark,” Acton replied. “We can work together. Let’s make this deal.”
Koum walked out of the room and found Zuckerberg. “I just talked to Brian,” Koum said. “He thinks we should work together and that you’re a good guy and we should do it.”
The two of them shook hands and then hugged. Zuckerberg remarked it was “f–king exciting,” and whipped out a bottle of Johnnie Walker Blue Label, which he knew was Koum’s favorite Scotch. They each called their business-development directors to come over and finalize the process. About an hour later Koum drove home in his Porsche and went to bed.
Lawyers and bankers raced through the weekend to get deal papers to sign by Wednesday morning before everyone broke for the annual Mobile World Congress in Barcelona. Rather than signing them at WhatsApp’s headquarters, they drove two blocks, at Jim Goetz’s suggestion, to 101 Moffett Boulevard, the abandoned building where Koum once collected food stamps as a teenager. Koum signed them on the main door.
When they got back to the office, Koum sent a WhatsApp message to “All WhatsApp,” the chat group for company employees, and called them into the conference room for a 2pm meeting.
“Look, here’s what’s happening,” he said after everyone had piled into the room. “We’re merging with Facebook.” Koum and Acton told their shocked employees they would be okay and still operate on their own. At 2.30 p.m. the conference-room door opened again and in walked Mark Zuckerberg. He spoke briefly with WhatsApp’s small staff and shook hands. After a conference call with investors, Koum got back to work.
“We still have a company to run,” he says matter-of-factly.
Now it’s down to Zuckerberg and Koum to figure out how to make WhatsApp worth the $19 billion Facebook just paid for it. The first move is to make sure the app keeps working. The Saturday after the deal was announced people around the world slammed WhatsApp’s servers with new sign-ups. The app suffered a four-hour outage. The timing was coincidental, according to Acton, but nonetheless bad for a startup that prides itself on reliability.
Koum and Acton are so fixated on uptime that no one is allowed to talk to WhatsApp’s server guys in the months before Christmas as they prepare for the message deluge. Visitors are rarely allowed into the office, lest they be a distraction. A whiteboard in the office shows the number of days since the last outage or incident, as a factory might show a tally for injuries or deaths.
“A single message is like your firstborn child,” says Acton, a new parent himself. “We can never drop a message.” He pulls up a photo of his late stepfather, sent to his phone in April 2012. “This is why I hate Snapchat,” where photos and messages disappear after viewing.
WhatsApp’s success boils down to a couple of technical advantages: Koum made it one of the first mobile apps to sync with a phone’s contacts. After he got fed up with forgetting his Skype user name and password, he went through the painstaking process of phone-number normalization for WhatsApp, ditching logins and passwords to make his service as simple as sending an SMS. The numbers on your phone are “your real life network,” he says.
Koum and Acton also picked up years of experience at Yahoo in building networks to scale, servers that could handle hundreds of millions of people’s data without buckling. They knew to restrain their user growth in the early days where other startups would have ramped up.
“Instead of the standard mentality of ‘get big fast…’” says Acton. “We took a different approach,” Koum adds. Instead of Amazon cloud services, WhatsApp also uses dedicated servers that run on niche operating systems like Erlang, built for telecommunications, and FreeBSD, an older alternative to the more-popular Linux, that is dedicated to servers. It gives them a tighter control on infrastructure.
WhatsApp’s speed and deceptively simple interface could see it permanently trump its peers in the same way Facebook beat out rivals MySpace and Orkut, but its old-fashioned business model is unusual. Though other messaging apps like China’s WeChat, South Korea’s KakaoTalk and Canada’s Kik significantly trail WhatsApp in active users, they’re free and they sell ads, games and digital stickers that have seen them book heftier revenues.
WeChat, owned by state-backed Tencent and billionaire Ma Huateng, is letting some of its 270 million active users buy snacks in vending machines in the Beijing subway as an e-payments experiment. Analysts at Barclays estimate it to be worth $30 billion. Kakao is forecasting $200 million in revenue for 2013, deriving half of that from games. LINE, widely expected to IPO this year at a reported $8 billion valuation, brought in $336 million in 2013 revenue from a mix of selling digital stickers, in-app games and special accounts for advertisers.
Such extras are “junk,” says Acton. He fears stickers would draw WhatsApp into the content business; LINE’s series of bunny and bear sticker characters have already made appearances on TV shows in Japan. The unsexy mission of WhatsApp is reliability.
The dollars will start coming in greater numbers once WhatsApp can iron out dead-simple billing arrangements with wireless carriers. Koum doesn’t want to risk putting users off with a complicated payment-request system and watch them run to free rivals. Right now it charges only in the handful of countries like the United States and United Kingdom, where credit card penetration is high and mobile payments are mature; that’s still not the case in the Netherlands, where half the population use WhatsApp but aren’t yet charged for the privilege.
Google is striking billing deals with carriers on behalf of all Android apps, but progress has been slow: Android carrier billing is available in just 21 countries, and to the ongoing chagrin of other developers, mobile payments still aren’t standardized. Koum thinks the real money will start flowing by 2017 and beyond, at which point he plans to have 1 billion users.
“We are very early in our monetization efforts,” says Neeraj Arora, WhatsApp’s business-development manager. “Revenue is not important to us.” Arora has brokered partnerships with about 50 carriers to pre-bundle the app into texting plans. The company has also struck a noncommercial partnership with Nokia to put a WhatsApp button on the inexpensive Asha 210 phone.
Keeping people from switching to another service is priority number two. The fear of losing eyeballs is what drove Zuckerberg to pay so dearly, but competitors say there’s still not much stopping them from leaving WhatsApp, and that the founders have tunnel vision.
“For the last five years WhatsApp has been exclusively focused on delivering ‘SMS but free,’ and they have done a great job at that. But at some point the user is going to move on,” says Ted Livingston, a former BlackBerry engineer who founded the teen-friendly mobile messenger Kik, which sells digital stickers and lets its users play games with each other.
“This is why WhatsApp feels like BlackBerry to me. For years BlackBerry was exclusively focused on e-mail. But once the consumer understood this, they asked, ‘What comes next?’ The iPhone answered that question, and all of a sudden BlackBerry was left behind.”
For now Koum is staying focused on the two priorities: keeping WhatsApp running and keeping users from going away. He can do so without the burden of building out the financial and legal infrastructure of a wholly independent company. “Fundamentally what we care about is building a product and great user experience,” he says. “[Mark] understands the network effect and he always talked about making the world more open and connected. Connected is where we come in.”
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