Image: Robert Gallagher for Forbes Grooming by Tamara Brown / Artists Untied
The subject line of the e-mail was like every other come-on that hit Jan Koum’s inbox in the spring of 2012. He was pounded daily by investors who wanted a piece of his company, WhatsApp. Hatched on his birthday, February 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.
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 co-founder, 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 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 percent of the company) plus $3 billion in restricted shares. Koum, a shy but brilliant engineer who moved from Ukraine to the US with nothing, will join the Facebook board and, after taxes, pocket $6.8 billion. His co-founder, 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, gets $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 is one of the world’s most commonly used utilities after e-mail and the telephone, and will introduce voice calling later this year. Its 470 million users have erased $33 billion in SMS revenue from wireless carriers. WhatsApp charges nothing for the first year and $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 US and Britain, where mobile payments are relatively mature. WhatsApp believes $1 billion in annual revenue is within reach by 2017. Insiders say the app could also start charging airlines or companies like Uber for the right to send messages into WhatsApp with user 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 December 1, 2013. 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 organise labour 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.”
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, 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 focussed 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, February 11.
Image: Robert Gallagher for Forbes
WhatsApp co-founders Brian Acton and Jan Koum, exiles from Yahoo and rejected by Twitter and Facebook. Guess who had the last laugh
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 raced back to Facebook 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. 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 now indicate, his meeting may 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 capitalisation of Twitter (currently $30 billion), WhatsApp’s global user base and the company’s future plans for monetisation.
On Thursday Koum and Acton went to Zuckerberg’s house for dinner at 7 pm, 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 pm 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, February 14, Koum and Acton posed for a photo shoot with Forbes at their office.
When the photographer left at 6:30 pm, 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 9 pm. “I just want to check if you’ve made a decision either way,” Koum said, giving his friend the finalised 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 favourite Scotch. They each called their business-development directors to come over and finalise 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 ‘WhatsApp All’, the chat group for all employees, saying there would be an all-hands meeting in the conference room at 2 pm.
“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 pm 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.
To understand why WhatsApp got where it is today, you have to walk a couple of blocks from its unmarked headquarters in Mountain View to a disused white building across the railroad tracks, the former location of North County Social Services, where Koum once stood in line to collect food stamps.
Koum was born and raised in the small town of Fastiv, outside of Kiev, Ukraine, the only child of a housewife and a construction manager. Electricity and hot water were limited. His parents rarely talked on the phone, in case it was tapped. It sounds bad, but Koum still pines for the rural life he once lived, and it’s one of the main reasons he’s so vehemently against the hurly-burly of advertising.
At 16, in 1992, Koum and his mother immigrated to Mountain View to flee a troubling political and anti-Semitic environment, and got a small two-bedroom apartment through government assistance. His dad, who died in 1997, never made it over. Koum’s mother had stuffed their suitcases with pens and a stack of 20 Soviet-issued notebooks to avoid paying for school supplies in the US. She took up babysitting, and Koum swept the floor of a grocery store to help make ends meet. When his mother was diagnosed with cancer, they lived off her disability allowance. Koum spoke English well enough but disliked the casual, flighty nature of American high school friendships; in Ukraine you went through 10 years with the same, small group of friends. There, he says, “you really learn about a person”.
Koum was kicked out of high school and had to attend an alternative programme, but by 18 had taught himself computer networking by purchasing manuals from a used-book store and returning them when he was done. He joined a hacker group called w00w00 on the Efnet Internet relay chat network, squirreled into the servers of Silicon Graphics and chatted with Napster co-founder Shawn Fanning.
He enrolled at San Jose State University and moonlighted at Ernst & Young as a security tester. In 1997 Koum found himself sitting across a desk from Acton, Yahoo employee No. 44, to inspect the company’s advertising system. “You could tell he was a bit different,” recalls Acton. “He was very no-nonsense, like ‘What are your policies here? What are you doing here?’” Other Ernst & Young people were using touchy- feely tactics like gifting bottles of wine. “Whatever,” says Acton.
It turned out Koum liked Acton’s no-nonsense style, too: “Neither of us has an ability to bulls--t,” says Koum. Six months later Koum interviewed at Yahoo and got a job as an infrastructure engineer. He was still at San Jose State University when, two weeks into his job at Yahoo, one of the company’s servers broke. Yahoo co-founder David Filo called his cellphone for help. “I’m in class,” Koum answered discreetly. “What the f--k are you doing in class?” Filo said. “Get your ass into the office.” Filo had a small team of server engineers and needed all the help he could get. “I hated school anyway,” Koum says. He dropped out.
When Koum’s mother died of cancer in 2000 the young Ukrainian was suddenly alone. He credits Acton with reaching out and offering support. “He would invite me to his house,” Koum remembers. The two went skiing and played soccer and ultimate Frisbee.
Over the next nine years the pair watched Yahoo ride multiple ups and downs. Neither of them liked dealing with ads. “You don’t make anyone’s life better by making ads work better,” says Acton. In his LinkedIn profile, Koum unenthusiastically describes his last three years at Yahoo with the words, “Did some work”.
In October 2007 they left for a year of decompression, traveling around South America. Both got rejected for jobs at Facebook. Koum was eating into his $400,000 in savings from Yahoo and drifting. Then, in January 2009, he bought an iPhone and started using the App Store. Here was a new industry in the making. He visited the home of Alex Fishman, a Russian friend who would invite the Russian community to his place in West San Jose for weekly pizza and movie nights. Up to 40 people sometimes showed up. The two of them stood for hours talking about Koum’s idea for an app over tea at Fishman’s kitchen counter.
“Jan was showing me his ad- dress book,” recalls Fishman. “His thinking was it would be really cool to have statuses next to individual names of the people.” The statuses would show if you were on a call, your battery was low or you were at the gym. Koum could build the guts of the service, but he needed an iPhone developer. So Fishman intro- duced Koum to Igor Solomennikov, a developer in Russia whom he’d found on RentACoder.com.
Koum almost immediately chose the name WhatsApp because it sounded like ‘What’s up?’ A week later on his birthday, February 24, 2009, he incorporated WhatsApp in California. The app hadn’t even been written yet. Koum spent days writing the software to synch his app with any phone number in the world, poring over a Wikipedia entry that listed international dialing prefixes—he would spend many infuriating months updating it for the hundreds of regional nuances.
Early WhatsApp kept crashing or getting stuck, and when Fishman installed it on his phone, only a handful of people in his address book had downloaded it. Over ribs at Tony Roma’s in San Jose, Fishman went over the problems, and Koum took notes in one of the Soviet-era notebooks he’d saved for important projects. Koum almost gave up and muttered to Acton about the need to look for another job.
“You’d be an idiot to quit now,” said Acton. “Give it a few more months.” Help came from Apple when it launched push notifications in June 2009, letting app developers ping users when they weren’t using an app. Koum updated WhatsApp so that each time you changed your status—“Can’t talk, I’m at the gym”—it would ping everyone in your network. Fishman’s Russian friends started using it to ping each other with jokey statuses like “I woke up late” or “I’m on my way”.
“At some point it sort of became instant messaging,” says Fishman. “We started using it as ‘Hey how are you?’ And then someone would reply.” Koum watched the changing statuses on a Mac Mini at his town house in Santa Clara and realised he’d inadvertently created a messaging service. “Being able to reach somebody halfway across the world instantly, on a device that is always with you, was powerful,” says Koum.
The only other free texting service at the time was BlackBerry’s BBM, but that only worked among BlackBerrys. There was Google’s G-Talk and Skype, but WhatsApp was unique in that the login was your own phone number. In September 2009 Koum released a new version with a messaging component and watched his active users suddenly swell to 250,000.
He needed help and went to see Acton, who was still unemployed and dabbling in another startup idea that wasn’t going anywhere. In October Acton got five ex-Yahoo friends to invest $250,000 in seed funding and as a result was granted co-founder status and a stake. He officially joined on November 1. They worked off cheap Ikea tables in a subleased space in Evernote’s converted warehouse in downtown Mountain View. They wore blankets for warmth. There was no sign for the office.
“Their directions were ‘Find the Evernote building. Go round the back. Find an unmarked door. Knock,’” says Michael Donohue, one of WhatsApp’s first BlackBerry engineers, recalling his first interview.
With Koum and Acton working for free for the first few years, their biggest early cost was sending verification texts to users. The founders occasionally switched the app from free to “paid” so they wouldn’t grow faster than their subscriber income. In December they updated WhatsApp for the iPhone to send photos and were shocked to see user growth increasing even with the $1 price tag on. “You know, I think we can actually stay paid,” Acton told Koum.
By early 2011 WhatsApp was squarely in the top 20 of most countries’ App Stores. (The US was slow to catch on, with its proclivity for unlimited texting plans.) Koum and Acton were batting away all requests from investors. Acton saw VC funding as a bailout. But Sequoia partner Jim Goetz spent eight months working his contacts to get either founder to engage. He’d met with a dozen other messaging companies, such as Pinger, Tango and Baluga, but it was clear WhatsApp was the leader, and to Goetz’s surprise the startup was already paying corporate income taxes: “The only time I’ve seen that in my venture career.”
He eventually got Koum and Acton to meet. They barraged him with questions and told him ads would be verboten. They eventually agreed to take $8 million from Sequoia in April 2011 at an $80 million valuation.
Image - Houston: David Paul Morris / Bloomberg; Williams: Brad Barket / Getty Images for Wired
Two years later in February 2013, when WhatsApp’s user base had swelled to about 220 million active users and its staff to 30, Acton and Koum agreed it was time to raise some more money. “For insurance,” says Acton, who recalled that his mother, who ran her own freight- forwarding businesses, used to lose sleep over paying the bills. “You never want to be in a position where you can’t make payroll.” They decided to hold a second funding round, in secret. Sequoia would invest another $50 million to up its stake to 25 percent, valuing WhatsApp at $1.5 billion. At the time Acton took a screenshot of WhatsApp’s bank balance and sent it to Goetz. It read $8.257 million, still in excess of all the money they’d received years before.
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 founders say it was coincidental, but it was bad timing 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. “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.
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 where credit card penetration is high and mobile payments are mature. 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 standardised. Koum thinks the real money will start following by 2017 and beyond, at which point he plans to have 1 billion users. “We are very early in our monetisation efforts,” says Neeraj Arora, WhatsApp’s business-development manager.
“Revenue is not important to us.” Arora has brokered partnerships with about 50 carriers to prebundle the app into texting plans. It has also struck a non-commercial 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, and there’s not much stopping them from leaving WhatsApp.
“For the last five years WhatsApp has been exclusively focussed 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. “This is why WhatsApp feels like BlackBerry to me. For years BlackBerry was exclusively focussed 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.”
Koum is staying focussed on the two priorities: Keeping WhatsApp running and keeping users from going away. A couple of nights a month he pulls up to a nondescript cinder-block building in San Jose, grabs a gym bag and walks into a dimly lit gym for a private boxing lesson with a diminutive, gum-chewing coach standing next to a boom box blasting rap music. “He likes Kanye,” the coach says, smiling. He holds two mitts up high as 6-foot-2 Koum throws slow but powerful punches. Every few minutes Koum sits down for a break, slipping the gloves of and checking messages. Koum’s style is very focussed, the coach says. He doesn’t want to get into kickboxing, like most other students, but just wants to get the punching right. You could say the same for a certain messaging service that wants to be as straightforward as possible.
It’s true, Koum says, ruddy-faced as he puts on his socks and shoes. “I want to do one thing and do it well.”
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(This story appears in the 04 April, 2014 issue of Forbes India. To visit our Archives, click here.)