March 3, 2014

Venture Capital Strikes Again - WhatsApp


2009 was a rough year for Brian Acton. He was turned down for a job after an interview with Facebook. He was also turned down by the HR department at Twitter that same year. Four years later, he sold his company (WhatsApp) to, you guessed it, Facebook - for $16 billion.

That’s billion.

With a “b”.

The composition of the deal includes $4 billion in cash and approximately $12 billion worth of Facebook shares. The agreement also accounts for an additional $3 billion in restricted stock units granted to WhatsApp’s founders and employees that will vest over four years on top of the $16 billion cash and Facebook stock. That’s a total valuation of $19 billion.

$3.5 billion of that amount is said to go to Sequoia Capital (the sole venture capital firm invested in the company) for $58 million invested in the service over the last three years. Not a bad payoff for their role in nurturing the growth of WhatsApp.

How did this come to occur? First, a little history on the latest darling in the tech acquisition market. WhatsApp was the brainchild of Brian Action and cofounder, Jan Koum. The pair met as engineers at Yahoo in the late 90’s and quit in 2007. They spent a year traveling in South America to reset their innovation engines and incorporated WhatsApp in early 2009. Progressing from the signing of the incorporation documents to a $19 billion valuation took just a few days shy of five years.

Why is WhatsApp worth $16 billion (plus $3 billion in RSUs) to Facebook? It’s doubtful that it has to do with revenue streams emanating from the semi-optional $0.99 subscription fee (after one year of free service) as it seems that only a fraction of WhatsApp users ever pay a dime. Facebook management could make the fee requisite, but they have stated that “WhatsApp will remain autonomous” and that “nothing will change for users.” The company’s founders are adamant that the app stay ad-free as well. Facebook's move may have been more strategic - buying out a potential competitor before it gets too big. It is no secret that Facebook has been attempting over the past couple of years to get a deeper foothold in the mobile market. WhatsApp’s user base (450 million monthly active users and counting) is highly engaged - 70% of users being active on the message app each day - and would help cement Facebook’s place in the mobile communications arena. 

Facebook competitor, Google, made a $1 billion offer for WhatsApp less than a year ago. It has also been reported that Google made another offer for $10 billion more recently. Facebook’s acquisition may have been an attempt to thwart the search-giant (or another threatening competitor) from scooping up the company with another attempt down the road. 

In this day and age, no conversation regarding tech would be complete without addressing data and its value. Facebook is known for its aptitude with data-collection and monetization through highly-targeted ad campaigns for paying businesses. They can now potentially leverage the amount of data in our day-to-day interactions with friends and family in the form of mobile messaging - and apply it to Facebook. This would keep WhatsApp ad-free and still be of added value to the social media platform. 

Finally, in addition to their mobile-messaging platform, it has been speculated that Acton and Koum have been working on a free voice calling feature for the app. Such a feature could be a MAJOR game-changer for mobile going forward.

Ever thought that Facebook would become a telecom company?

Now the potential is there. 

Ok. So is all of this worth $19 billion?