WhatsApp

0:00 I do have to say that based on all the other companies we analyze, I was expecting to see gross margin highlighted in their financials and talked about in the presentation, but Facebook's actual operating margin is so good that that is what shows up everywhere,'cause they actually make money and they make a ton of it. It's like a dramatic departure from a lot of the episodes we've done in the last year. So that's That's insane. I mean the fun the way that like think about that status if like for every dollar they bring in house, they keep forty five cents even after paying for everything. All their fixed costs, all their employees. It's just a cache machine. That's why it's a six hundred and thirty billion dollar market cap company.

0:39 Yep. Welcome to season six, episode one of Acquired. the podcast about great technology companies and the stories behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts.

1:02 Today we are talking about WhatsApp. An app that Facebook paid$22 billion for and has done virtually nothing in the six years since. And in fact it was reported last week they are uh that's right, David, abandoning near term efforts uh to enable advertising in WhatsApp, which of course is Facebook's core business model. You said twenty two. Billion, right?

1:24 Just to make sure we're on the same side. That's twenty two Instagrams right there. So today uh we will decide was this one of the worst acquisitions of all time, or did Facebook make a genius move even for this insanely, insanely high cost? I'm super looking forward both to telling this story, because it's an amazing story. But also to debating that question. Cause um You know, I think there are really good arguments to be made on both sides.

1:51 This is as classic as a classic acquired episode gets. We have more than five years of of hindsight. Uh we've got a big price tag. We had lots of reporting around the time of the sale, and frankly not a ton of follow up since. So it's gonna be fun to tell uh tell the WhatsApp story from the very beginning and as you said, debate that very question. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

2:38 So the founders did exactly what great founders do. operate with obsessive customer focus. They embedded inside a massive law firm. For months. They sat with the lawyers just watching how the work really gets done.

2:53 And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's Bet Here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work. and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Legora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.

3:58 And crazily, they went from one million to a hundred million in ARR. In about. Eighteen months.

4:06 truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reach for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired. And just tell'em that Ben and David sent you. If you're a fan of the show and you want to go deeper on company building topics the nitty gritty of how companies today are solving problems in real time, you should consider becoming an acquired limited partner.

4:41 In recent episodes, we interviewed the founder of fast growing Chicago startup, Cameo, and we did another episode that turns the tables and interviewed us on the business strategy behind acquired. You can get started with a seven day free trial and listen right here in the podcast player of your choice by clicking the link in the show notes or going to glow.fm slash acquired. David. I think it is time to dive in. Dive in. You know, there's something funny

5:09 About messaging apps. I'm just thinking looking at our script here. Where we're gonna start. And how we started the Slack episode with uh Dharma Butterfield soon to become Stuart Butterfield on a commune. Growing up on a commune in British Columbia. There's something about communism and messaging apps. Uh I don't know what it is, but it just makes for it's a really good breeding ground for founders of messaging apps. And strong community.

5:37 So of course I'm referring to we are going to start. In the mid nineteen seventies. In the Soviet Union. in Ukraine. In a little village.

5:49 Uh just outside of Kiev. Where a boy named Jan Coombe. Is born to a Jewish family. Uh in nineteen seventy six. In this village in the then Soviet Union.

6:01 And this is a Pretty not great time to be All of those things. In Ukraine in the Soviet Union under communism in the mid nineteen seventies.

6:15 And Yan actually kinda later. talks about this and he says he says of his his time the school he attended there It was so run down that our school didn't even have an inside bathroom. Imagine the Ukrainian winter negative twenty degrees Celsius. where little kids have to stroll across the parking lot to use the bathroom. Society was extremely closed off.

6:36 You can read nineteen eighty four, of course, the book nineteen eighty four, but living there was experiencing it. I didn't own my own computer until I was nineteen. But I did have an abacus. That was the reality that this young man, Jan Coomb, is growing up in. And he would stay in Ukraine until he was sixteen years old and and this would have just such an impact on Everything that's to come, this entire story. His dad worked for a state run construction company in the village. It was really hard and it was a very anti Semitic environment. Finally, by the time Jan was sixteen,

7:13 his mother and his grandmother and he were able to escape. This is in nineteen ninety two. The Berlin Wall had fallen at this point. They were able to get out of the country and come to America. So the three of them Move to Mountain View, California.

7:29 Jan is sixteen years old. He barely speaks any English. And when they arrive, his mom starts working as a nanny to uh support the family. But It's not enough. They live in government assisted housing. In Mountain View.

7:44 They're on food stamps. Jan's dad never is able to leave the Ukraine. He very sadly passes away in nineteen ninety seven, never comes to America, and then even more tragically, you know, a few Years after that, in two thousand, we're gonna talk much more about what happens before the year two thousand. Jan's mom is diagnosed with cancer and passes away in two thousand. So here's this this guy, you know, now at the end of the day and the end of this story, you know, Jan walks away with nearly seven billion dollars after taxes from the WhatsApp sale. His life was this man has been through a lot. Yeah, no kidding. And I think you opened that chapter with saying it was a pretty not great time

8:22 That is a very soft way to describe. A very hard, uh hard existence. So when it comes to America, like I say, he doesn't speak much English. I mean, he enrolls in American high school in in you know, California. He doesn't get along with the other kids there. He's had a lot of trauma in his life. He's got this kind of one thing that sort of uh um ends up becoming a light in his life and then he get is that He's in Silicon Valley. This is the mid nineties. He gets really into computers. Um, and he actually teaches himself programming and like computer like networking by purchasing manuals from a used bookstore, a local used bookstore.

9:00 And uh reading through them, teaching himself, uh probably working on the school computers, learning how to program. And then returning them to the store and getting the money back after he's done. He ends up kinda through this. He joins while he's still in high school, a hacker group. online called Woo Woo. W zero zero W zero zero. Elite Speak Woo Woo. And uh he ends up meeting NAFTA co-founder Sean Fanning through that, and he's like He kinda finds his community on the internet. After

9:31 high school and through all this. He enroll in San Jose State University, uh in college. But college is kinda not for him and he ends up dropping out. He first takes a job bagging groceries. Then he ends up working at Fry's Electronics. And if you've hung out in Silicon Valley and I remember when I was uh when I was at T S B at Stanford, there's still like well Now in twenty twenty, I don't know, but when I was at D SP there's still a Fry's Electronics on El Camino Real in uh in Palo Alto. Yep.

9:59 Um Jan works there. Then from there he ends up working at a early internet service provider at local ISP. And through that then he ends up actually joining Ernst and Young as a like Computer security like penetration tester.

10:15 So he's putting all of his like hacker cred to use even though he's a college drop out. White hat. Yeah. Unclear, you know, white hat by day, unclear what Jan was doing at night. Um This is where kind of everything changes. So he Goes to a conference while he's with Ernst and Young. And at the conference, uh, this is now kind of mid nineties, he meets Yahoo co founder David Philo. Uh he's at an Apache security conference. They kinda hit it off and David's like

10:48 Hey, you know, when we get back to California. Why don't you come into Yahoo and interview for a job? So Jan does he ends up joining Yahoo as an infrastructure engineer becomes a real engine. And he

11:01 meets in his group when he joins a man who ends up you know I think at first kind of becoming a mentor figure. Uh and then a deep friend, man named Brian Acton. Yeah. Who is Brian. Brian has kind of a

11:17 Not quite as uh dramatic, but equally really interesting story. Brian was born in Michigan in nineteen seventy two. I'm Believe his parents may have divorced when he was quite young, but he was mostly raised by his mom, who ran her own freight forwarding business. kinda incredible. Like this woman, you know, with a child just like running a freight forwarding business. I I would imagine not a super

11:43 female friendly business uh in those days. Not the venture capital darling that freight forwarding is today. Yeah. This is way pre-convoy. And pre uh uh Flexport. Uh what's the Flexport. Yeah. She then moves him to Florida and he spends most of his growing up years in central Florida, I believe. She instills in him kinda this ethos of like

12:07 Both. entrepreneurship and like small business entrepreneurship, but also like huge responsibility to like meeting payroll and like scraping by and getting you know getting through month. He ends up he's super bright. He ends up going to Penn on a full scholarship to study engineering.

12:26 while he's there and he's learning about engineering in his freshman year Yeah. First you hear is kinda about Silicon Valley. And about this, you know, university called Stanford. You've probably like heard of un of Stanford before, but like You know, him in his background and nobody in Florida was thinking about going to Stanford.

12:43 Applying the transfer. And as accepted into Stanford and transfers out to California his sophomore year and majors ends up majoring in computer science at Stanford. This ends up being huge for him. He interns at Apple his junior year.

12:58 And then after graduation, he joins Yahoo as employee number forty four. In the really early days. And he works super closely with David Philo. Uh he works with Chi Lu and like all these like super legendary engineering leaders that end up coming out of Yahoo because in a lot of ways, you know, Yahoo was

13:19 the first we haven't really covered it enough on this show yet, but it was the first like Um successful uh internet company. Yeah. Yeah. Right. Internet directory, basically. It's funny. Yeah. Yeah, you mentioned uh Chi Lu, so She obviously is very notable for his work at at Yahoo. I know him as like my mega skip level boss from Microsoft when he ran Bing,'cause Microsoft recruited him over uh and he ran Search for Microsoft and then ultimately actually took over all of Office as well. Well, and of course, you know, the relationship between Yahoo and Microsoft, many of our listeners probably know Is really uh

13:55 Long and complicated. A topic for another day. But Brian and Jan kind of become Kindred spirits uh when Jan joins. Uh Yahoo and Brian. really rises through the l ranks. He ends up becoming the chief architect of Project Panama within Yahoo, which was super you know, they would talk about it on their earnings calls. I remember Carol Bart talking about it all the time, and um and then Marissa Mayer after she became CEO. And that was a

14:24 massive project to re architect all of the back end of how Yahoo Search worked and how ads worked on Yahoo Search. So the two of them with Brian kind of leading on the technical side go through this experience of re architecting at massive scale this, you know, original internet company. But doing it for like while this company is going from, you know, over a hundred billion dollar market cap, darling of Silicon Valley All the way down to below ten and then just plummeting plummeting. When what did they what did Verizon ultimately buy Yahoo for? I think it was like three billion dollars or something.

15:03 I don't know, but uh Yeah, if if your final resting place is at Verizon then Yeah, it's sort of irrelevant where your final market cap was. So they get this incredible technical experience, but they also see like There's Business

15:18 portal um that Yahoo is. Like it's so Fickle and it's so dependent on user attention. And it's so dependent on advertising. And they start to believe that Yahoo

15:33 makes a ton of product compromises in service of Their ad partners. And that that was a big reason, you know, they uh they simultaneously through these years see the rise of Google. And you know, Google famously is just like That these days just one white page with a search box on it. display ads and doing all this stuff. And they become super, super disillusioned with it. And you bring up an important point there. Yahoo was the very first internet company that's business model was to monetize attention. I don't need to paint the picture for listeners that the most successful company to ever be on the internet and monetize attention is Facebook.

16:12 And so I think there's this uh this sort of incredible bookending of the story. Well that's where I was I was gonna be going with it. And and it's also during this time famously that Yahoo tries to acquire Facebook for a billion dollars. Um you know Is this when Mark cried in the bathroom after rejecting it? I think so. I think so. Um And You know, this is gonna be a meta theme of this episode, but like this idea of monetizing attention through advertising. is in many ways as old as the internet itself. Yahoo was the first big company that was built to do that.

16:44 And Facebook is the new Yahoo in so many ways. So they get so disillusioned. I don't know if this is still the case on on Yan's LinkedIn, um, but uh w when he was leaving Yahoo and then the first couple of years of WhatsApp, he described his last three years uh at Yahoo, you know, his sort of like description on LinkedIn of your role and what you did. He said Did some work. Period. Um of course they were working on Project Panama. In November of two thousand seven. Brian and Jan have finally kinda had enough and they both leave right the same I think it may have been the same day that they Leave Yahoo. And they're just like

17:22 Completely burnt out. They both decide they're gonna take a bunch of time off. Brian had recently been through a divorce, you know, and Yan had had such a hard life up into that point and lost his parents in the past few years. So they say, you know, we have enough savings. We got into Yahoo, especially Brian, early enough that they can afford to just really take extended time off and travel. And at one point after they get pretty bored, they both this is famously end up applying for jobs at Facebook, which is of course on the rise now, uh, we're in two thousand eight. And they are both rejected for jobs at Facebook. Brian uh even tweets about it. Facebook clearly does not need their talents or ideas. Yeah. Which is so funny because like they are especially Brian, but both of them especially Brian, like Truly world class.

18:12 Engineers. There's a thing though that was going on at Facebook at that time that I think a lot of people forget about. Not that the company's benevolent now, but whereas Google was hiring a lot of the smartest people who were Right. And and really like deep, nerdy academic sort of learning. Facebook was obsessed with hiring a lot of people who were well known in the communities of the languages that they wrote in. And so they had, you know, many of the early sort of Python people. They had a lot of sort of open source leaders. And and frankly, there was a lot of like

18:50 There was a lot of not invented here sort of syndrome, and there was a lot of you're not good enough for us and we are sort of uh There was a cockiness that permeated, I think, the development organization at that company early on that it's not surprising that someone really accomplished, but who may have been of a different stripe or tribe, uh was was, you know, not um not welcomed and not revered. It's really interesting. I wasn't gonna get into this in uh history in fact, but it's worth a worth a pause. Most of the back end of WhatsApp ends up getting written in Erlang, which is like this super obscure programming language that was actually developed by Ericsson. In like the

19:27 eighties maybe Ericsson the big telecom The Nordic telecom time. As like just purely for telecom use cases for like, you know, rapid messaging, but like was super looked at as like this is Backwater, outdated, old school, like, you know. This is about as far away from go as it gets, like

19:45 And of course now if you start your company and and write it in Erlang, like now you have two problems. The problem that you're trying to solve for your company and the problem that you can't recruit any engineers. Exactly. There's tons of engineers that are are of specifically obsessed with things like Erlang and Rust and very like more up and coming and or fringe programming, but gosh, you have to get specific then in your Yeah. So okay, back to picking up the story. Yan. He's single. He's traveling around. And remember, he's got this history of he was a hacker. He was, you know, a woo-woo member. And um it started as a as a pen tester. He is travelling around a lot of countries.

20:24 And he has a Nokia candy bar phone that he loves. He like really loved the old he still talks about how he loves the old Nokia phones. Um he had, of course, jailbroken this phone. and installed all sorts of like super hacker, you know, dev tools on it that you know you can monitor everything that's going on in the network and all this stuff. So he's like obsessively learning about all of these different telecom networks in the countries he's traveling to. And he would buy different SIM cards, you know, in all the all the countries and swap them in. But even like Jan is as techie and confident as it gets. He's basically a walking IT department. He still is having a nightmare trying to communicate with his friends back home and all around the world via SMS and and phone too. Like all these country codes you've got to dial. Uh you send off an SMS. You have no idea if it was delivered. Even if you did everything right, it might drop and fall through. And so he's especially when he's he talks a lot about Argentina. He does a trip to Argentina and for some reason he thinks the the country code in Argentina is just like so ridiculous that he's like dropping all these messages and he starts getting

21:33 really fed up and like he wants his friends to know back home what he's doing, that he's okay, and everything. So He finally comes back. And in January of two thousand nine, his birthday is in February. But he's just hanging out and he says, You know what? I'm gonna buy myself an early birthday present. I'm gonna buy an iPhone just to like hack around with. And of course the iPhone had come out in two thousand seven, but two thousand nine I think this would have been the iPhone three G

21:58 Either the three D or the three D S. I think probably the three D Yeah. S at this point. Um I think J July is when the three G S came out, if memory serves. But Apple had just, I believe it was in January of two thousand nine, they had just announced the SDK.

22:17 to allow developers to make apps. And I think it wasn't even like apps weren't the app store wasn't gonna ship until the summer. But the SDK was out there. I think that's right. Um I think I uh it may have been earlier, may have been been um at WW D C O eight they announced it, but yeah, it had I don't think it had shipped yet, or it was shipping right around that time, but the SDK came out with iPhone OS two. Yep. And so Jan of course is like Okay, great, like I'm there.

22:43 hack around on this. So he's got all this stuff swirling. And he has an idea and he tells A friend of his who's also a um I believe it's Russian uh immigrant in San Jose named Alex Fishman, who is a uh good buddy of Jan's. Hey, you know, I had this problem. I have an idea. Remember like, you know, AIM and ICQ and all these messaging services on desktop. They all have these, you know, the away messages. What I really want and what I would have loved when I was in Argentina and all these other countries is that I could just throw up

23:12 the equivalent of an away message and all my friends could know what I was doing and that I was okay. I'm just gonna build this out. On the new this new iPhone that I got. And Alex is like, Yeah, that seems like a good idea. And so Jan starts hacking on it. He starts thinking about what to do and he says, You know Really like what I want this to solve is, you know, everybody asking like what's up.

23:34 Uh, I just want, you know, this to be like the answer to what's up. So I'm just gonna call it What's App. And Alex is like, Yeah, great idea. And so Jan's Thinking some more. And he says, You know Okay, well two things. One. Aim and I CQ and all these messaging services on the desktop.

23:53 Issue with them which is You You have a cold start problem with the network. You know, you join, but none of your friends are on there. And so you gotta convince people to go Yeah. But with phones, you know, I'm really I'm digging into the

24:09 This new iPhone. W well it wasn't even called IOS yet at this point, right? It was like I forget what Apple was iPhone OS. S DK. And it's pretty locked down, but there's one

24:20 Feature that Apple lets developers access and that's the Address book. The contacts. What if instead of And at the time there was no special permission prompting for that. Yeah, you just actually reach right in. Reach your hand into the cookie jar. And um he's like, Man. What do you think if instead of having you know screen names and usernames We just use phone numbers because

24:45 all of the phone numbers of people you have, you're only gonna give your phone number to somebody you really want to communicate with and that you'd want them to know, you know, what your status is. So this might solve that cold star problem. And so I was like, Yeah, that that seems good, but you know, you're there's one thing you're gonna need like Yan, like you're great developer, you work to Yahoo and everything, but you you don't really know how to I know code for iOS. But it just so happens. You don't know this the archaic thing called objective C that was written at next that Apple has decided to carry forward into all their products to date. I know. So ridiculous. Um that like next is the you know, core of objective suite and and sweet. It's still still one of the greatest acquisitions of all time. Still. That'll have to go on our uh forthcoming acquired top ten list. Um

25:32 Yeah, wait, so before you get into hiring the IOS dev did they grow by texting all of your fr friends? Like did they did they reach in, grab the phone numbers out of your address book and then like I don't know believe so. I didn't find anything that they did like the LinkedIn playbook of actually go the step further in carpet bomb. But they did reach in and get all the contact information. And so they were checking. They would grab your address book and check Everybody on there. And I remember when I onboarded onto WhatsApp years ago.

26:03 It checks and and then they surface for you like Oh, hey. I think it even shows you your whole address book and then like checks like on WhatsApp who are in your address book. Yep, exactly. Got it. So anyway, Alex is like Oh yeah, I was working on another project and um I found this awesome dude in It back in Russia on rentacoder.com, who's a really great IOS dev. I loved reading that in the research. I know, so great. This guy named Igor uh Solomonikov. I think I'm pronouncing that right. And so Jan's like cool. He contract, they code up an app.

26:40 This you know, away message app. And they're getting ready to ship it. And yeah, it's like Oh man. Um It turns out, you know, in the in the app store, this new app store that uh Apple has. I guess the app store must have shipped at this point in time.'Cause we're now in Yeah, if I remember right, I think the they announced the STK at WW D C O eight, which would have been June and then shipped it probably four months later, three months later. So it would have been

27:06 out for a few months, but they wouldn't have had push yet, because that came in iOS iPhone OS. Push is coming in a sec. Uh so no no push, uh no push messages, no push notifications that apps third party apps can provide. So Yan's ready to Yan and Igor are ready to shift the app. And he's looking through the app store and he's like Oh. Um, we need to incorporate this as a company because they're all these developers and remember back when you remember back in uh well, you would been you would be done. You needed a dance number, but also if you didn't, you could ship it as an individual, but then your name is listed as the developer and then people start contacting you. Um yeah, you had to like fax stuff to Apple. Like this is this is the why I incorporated my first business is because this was a requirement of the app store, otherwise your name was on it. Totally. So get this. You will Ben you will totally appreciate this. So this is on Jan's birthday in two thousand nine, February twenty fourth. He he's like

28:00 Shoot, we gotta incorporate this. He drives up to San Francisco. He'd talk to like An accountant friend of his was like, How do I like incorporate a company? And the accountant's like, Oh no, no, don't worry about it. Like I got here's a template articles of incorporation in the state of California. There's like five articles there, and he's like, just like, you know, do a control H, you know, uh find and replace and put, you know What's up instead of whatever I got here. Then you drive up to San Francisco, you go to the secretary of of state in San Francisco, you show them the articles, they stamp it, you pay a hundred bucks, and you're done. So that's what Jan does. He drives up, he does that, he takes a photo of it and he sends it into Apple and boom. What's up Inc is born. Love it.

28:44 Uh not exactly, you know, usually you know, typically you're starting a start up, you have all these ambitions, you're like, Oh yeah, gonna go talk to you know gonna go talk to Wilson Cincini, or gonna go talk to any of the great law firms out there, man. My first app LLC was uh Legal Zoom. Like why not? Well, you even use Legal Zoom. Yama's just like he literally scribbled some stuff on paper and did it by hand. Um So uh they get that done. They ship the app. With these great expectations, Jan thinks it's gonna be so awesome. And in his own words direct quote. It fails horribly. And so what's the the functionality at this point? It's just the statuses. Like you can just say, like

29:27 Hey, in case you happen to open this app and check And you're curious what I'm up to, this is my status. It is literally just away messages. No notifications. If you happen to exactly like you said, if you happen to open the app, you can still have a way message just seemed like Pretty useless unless someone's trying to message you.

29:44 Right. Right. I mean The the So use usage is horrible. But they pick up People registering and downloading the app.

30:00 And this is this I thought was so fun, reminded me of these days. Um they do a pretty interesting growth hack. So There were so few apps. in the app store back then and I remember this, like I did this for years. I would check like every week. What are the new apps? Apple had the what's new section. And Jan realizes he's like, you know what? I can get a lot of people just trying this out.

30:23 If every week I change the name of the app slightly. Apple will put me in the what's news section week after week. I swear this is what he did. Uh crazy. Totally crazy. And so as a result, um, he's getting all these users. They're they're like trying at once, being like this is stupid and Stopping, but he does have a bunch of people. Like he's at least getting that. Feedback.

30:47 He knows like he's been the value a while and he's like all right, gotta keep like working on it, iterating on the product. Tries adding a bunch of features. doesn't really help. One thing I forgot to mention from back in the Yahoo days. Brian and Jan. bonded not just kinda over becoming friends and their ethos, but they also both are Incredibly passionate about Ultimate Frisbee. And they would play

31:07 Ultimate Frisbee together. And so they go to a game. Together one day when um when Yan's working on this. And he's talking with Brian afterwards and he's like, you know This is not working.

31:20 I should probably Just give up and go back to looking for a job. Go back to, you know, Facebook or find some other startup. And Brian is like No. You gotta keep going. Like you literally the quote is he says you'd be an idiot to quit now.

31:35 Give it a few more months. Keep working on it. Um And Brian's not actually involved with the company, right? Not at all. He's just a friend at this point in time. Uh and Brian was working on his own startup at this point in time. Uh I actually couldn't find out what that was. Uh but whatever it was. He eventually made the right decision to stop that. And this was I mean it's so fun we haven't used the history turns on a knife point phrase in a while here on maybe since Blockbuster. Yeah, maybe since Blockbuster. But like Jan was ready to quit.

32:05 And if Brian hadn't told him to keep going. He wouldn't have kept going long enough. Through W W D C Two thousand nine in the summer. When Apple introduces push notifications.

32:17 Boy is timing everything. Oh man. Is it Ever. The funny thing is. You would think and in hindsight now this is like so obvious. It's like, oh, now you know, I can send I don't have to rely on users randomly decided to open up my app and see what's going on. I can now send them notifications and prompt them to do this and like messaging duh, why don't we just build all of AIM instead of AL instant messenger and ICQ instead of uh just uh way messages.

32:45 Funnily enough, at first Jana's like, Oh, this is great. Now I will update WhatsApp so that every time you change your status It'll just broadcast the away message out to everyone. So you couldn't actually message. He was only broadcasting away messages. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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34:45 And just tell them. That Ben and David sent you. I was fortunate to like be living through this era and be very, very, very obsessed with the iPhone as I was like starting to create apps. So you might be wondering like why didn't AIM come to the iPhone? Well, they were. Like AIM was one early, early partner for Apple. Yeah, they they had an app on the app store very early. I wanna say IOS 3 like this early. The the other app that came out really early that um was originally I can't remember if it's a flash website or an HTML5 website, like a really early one, but it was called MEBO. And it was a cross service messaging client where you could have AIM and ICQ and it sort of like subscribed to all those different APIs. And there was also an Ebo desktop, right?

35:30 originally me. It was desktop, but they they Right, exactly. But then they they were um one of the early companies to have an app. And I I should go watch all dub dub videos, but I do think they were at one of these, um I think AI was like demoed on stage as this is a really good way to use notifications, um, to to send messages to people. If you're out there wondering like why didn't those companies just do it, they did. They brought the functionality they sort of ported from desktop. So it was sort of it had potentially too many features. It was it was not sort of um necessarily a native feeling experience, but it also didn't have the sort of genius thing that that Jan had with the network project. being based on phone numbers. Yeah, nobody else had that. That was a major major key to WhatsApp's success and ability to to outstrip all of the you know new entrants and aim and meebo and all all these legacy guys transitioning. The other important thing to know about, remember about what was going on at this time

36:28 Was there was Oh, you gonna say BBM? No, go for it. Oh. Uh Well, BBM, Blackberry Messenger, there also was A playbook of how to execute Messaging.

36:42 on mobile that had been around for several years and that was Blackberry Messenger. And these are the days people used to talk about Blackberry being crackberries. And you know, there really were two core use cases of Blackberry. And I think people forget this. One was corporate email. And that's what now when people think of and remember Rim and Blackberries, they think of that. But actually, no, a lot of consumers were using Blackberries. And the killer app was Blackberry Messenger. And it was uh fully featured mobile. Messenger.

37:15 Just like way ahead of its time, but it was limited to the Blackberry Network. Yeah, and the way people talk about BBM then is very similar to the way that uh people in a very uppity way talk about iMessage today, and the way that like people refer to oh blue bubbles versus green bubbles. Like I remember my friends who had blackberries then and of course I didn't. I was rocking my candy bar or I think I had a flip phone at that point. But I remember um one of my friends in college being like Oh yeah. No, I d I don't really I like texting. Like I don't I don't text people, but if they have black but like I'll definitely BBM. Like I really like you know that's nice. And of course like there's d slightly different feature set. Like you can see when things are red or not red, but like

37:54 It was the sort of like cool network to be on. It was the blue bubble. Yeah. So Young smart. And Brian's smart and you know Brian's kind of advising him at this point and and their friend Alex is is helping them and they realized pretty quickly and remember also they had this user base'cause they kept doing these growth acts of changing the name and getting new people coming in every week. They had this user base and the users were like, guys

38:18 Uh, I really just want a message. Like these away messages are nice, but can I can you please like just implement Messaging. Yeah. And they found that people were actually using the away messages coupled with the push notification that had just come out to sort of use it as a messenger anyway. So they would like frequently update their their status, other and their friends would update their status back like they were sort of hacking it to make it a messaging app. And it's going out to Everybody in their network. What's happened?

38:47 Twitter combined. Yeah, I was just saying it's kinda like early Twitter, yeah. Anyway, so they they figure this out like Okay, great. We're gonna build. messaging into this. They do. They launch it in like late August, early September of two thousand nine. And it

39:02 immediately takes off. Uh again, one because it's They really do a good job with the execution. It's super simple. The UI is very straightforward. But again, this address book innovation, the contacts. And not having to go through usernames and finding your friends and all that and everybody just being on there is major and and because

39:24 Again, they had had all those users that had used previous versions of the app. They had, you know, suddenly about a quarter of a million Users. Uh and so that's enough network density that people can start getting real.

39:38 Value. out of the app. And it just starts growing like gangbusters. So at this point Jan goes to see Brian again. And says like

39:47 Hey. This is Really working, like What do you think about coming and joining me? Full time and like

39:55 doing this for real and like let's raise some money and and make this happen. Brian says, Yep, I'm in. This is now for real. I'm gonna do this. And he says I'm gonna invest.

40:06 Some of my own money. F my Yahoo savings. And let's go round up. A bunch of our former friends at Yahoo and put and angel financing together. So they put together two hundred and fifty thousand dollars all from former friends and co-workers. Ryan joins the company officially. He gets um it's been reported roughly about a twenty percent stake in the company

40:27 Uh Yan owns the rest of the company and then um I don't know what the valuation was on the C round, so the You know, angel investors for their two hundred fifty K obviously get get a stake. And it kinda goes gangbusters from there. You know, Yan Uh he says. the much later in a talk. He's very uh direct, as you would imagine, given his uh Ukrainian upbringing. You know, he says he's so right. He's like look, we were lucky. We stumbled into something that people found really meaningful.

40:54 And what it was. Messaging. is the killer app for mobile. Like period, full stop. Like and it's true. It's come to bear in every country, on every platform.

41:04 Yeah, there's s there's so many things that you can do on your phone. And you know, Matt Culler at Benchmark famously, you know, talks about like the smartphone is the remote control for your life and it's Right, you can order a car to come pick you up and do all these things. But if you think about You know, both I imagine everybody listening to this, you personally, and certainly in aggregate the population, you spend by far the majority of your time forget Instagram, forget, you know, Uber, forget all of that. Messaging with your friends. That's the real primary killer app for mobile phones. Do you consider Twitter to be messaging?

41:38 That's a good question. No, I think it's different. I think it's social media. Um maybe social media is near or equal importance. But if like You think about like what's Definitely this is true for me. I'm curious if it is for you. Like what is the most important thing? Like I could live without Twitter on my phone, but I could not live without I message.

41:58 My most used app by almost a factor of two is Twitter on my phone by amount of time spent over the past week. Um and then m mail coming in at number two. And messages is down probably at like number four. I I do probably the most important communication in messages, but I'm in and out of it. I mean it it it doesn't have to be the dominant thing taking up the screen most of your time to be the most important thing on your phone. That's true. And probably Brian and and Jan would Totally agree with that. It's not about time spent. It's not about but but the most important conversations.

42:30 You're having in a You know, in a messaging relationship. Once they figure this out. Yeah, Yan then also talked about like before, you know, in sort of the what that one point oh version when it was just about statuses and away messages, it was just like Ben you talk about all the time about

42:46 The definition of product market fit. It was like you're pushing a boulder up a hill, you know, everything is hard. Like getting users to use it is hard, getting engagement. Nobody wants to invest. Nobody wants to work for you. This is before product market fit. Before product market fit. And then all of a sudden they have instant product market fit with messaging and Everything changes. People are adopting like crazy. All their old Yahoo friends want to come work for them. Investors start beating down their doors and like literally looking for them in unmarked locations and uh attempting to network their way to the founders.

43:24 Totally. And we'll get into how that comes together next in just a sec. But before they do take money. They do Another really smart thing again for them at the time. Uh and I think this might have actually been Brian that kinda came up with this in a s and

43:41 uh advocated for doing it. So they were free. It was a free app in the app store. But again, remember, think back to two thousand nine. There Paid and free hadn't you could do both in the app store and it hadn't yet shaken out that like free was the way to go. Um there were a lot of things. Yeah, and there were certainly no in app purchases or subscriptions. Like you could you could pay an amount of money to download an app or it could be free. Yep. And so Brian suggests

44:07 Well what if we Charge ninety nine cents for the app. In the app store. That would do Two things.

44:14 One It would dial down growth a little bit, which on the one hand is bad, but on the other hand, our servers are melting down and we gotta like pay for server costs. And remember they don't run on AWS because they're using Erlang and I think they ran on FreeBSD. It's also two thousand ten, like It's uh I don't know. What services are available? S three and like maybe E C two, but like AWS is not Huge yet. And and certainly not. Um

44:39 Cloud at all. Yeah. Building. Yeah, dy dynamically scaling apps are not are or dynamically scaling backends are not a thing yet. And remember, reliability for a messaging service. And preserving chat history is like the number one thing. So you don't want your service going down. So he's like, Okay, this might solve our our rate scaling problem or give us some breathing room.

45:00 And then two, you know. Give us a business model. And we can kinda control our own destiny. I I thought that was the craziest thing when I read it that like that I always knew it was a dollar and I knew like okay because that's like They think of this as like it's not that expensive to run the service. The most expensive thing is like sending the SMS verification every once in a while when a new person joins the service and we need to verify their phone number. So like that actually ends up being quite expensive.

45:26 to do that. Totally. But they're not these these guys aren't in value capture mode. They're just trying to figure out a sustainable way to sort of like keep the lights on so it's this dollar a year thing. It blew my mind when I realized that they were toggling the dollar on and off when they wanted to throttle growth so that their their back end could catch up. That is like That is some. Unbelievable product market fit right there. I know, I know. Unbelievable. Well and so the other thing though Yeah, they can charge ninety nine cents for the app because the value prop to consumers is Th unlike AIM and ICQ that are desktop.

46:00 Mobile messaging is truly an SMS replacement and SMS is super expensive. Even in the US. Like you were paying I remember this being the stupidest thing because you were you would pay for like I think you had to pay an extra ten dollars a month to get unlimited SMS. Like uh there was some era in like oh seven to twenty ten where you would pay by SMS and that was the dominant feature of phone plans. And I think that's how it mostly was internationally. But at least by like twenty ten, AT and others had adopted this unlimited texting for a ten dollar add on, which can I I like to pay a hundred and twenty dollars a year for texting. It's pretty It's like, yeah. The SMS protocol is limited to 160 characters, which is obviously a super small size of data that's transmitted back and forth, because with early cell phones, the way that the cell towers would know that your phone was still on their network was every second or two, they would just go ping all the phones and

47:01 there was an extra basically enough room for an extra hundred and sixty characters in that heartbeat that it was communicating back and forth with every phone anyway. And so it literally had no additional cost of goods sold to carriers to to to do this because it was just sending and receiving these extra you know, pieces of information when it would have been pinging those phones anyway. And so it's kind of a genius business model move on the carrier part, but I remember when I learned that as a consumer being So pissed like all those news stories of like you know Um Middle aged dad in you know.

47:35 Name your suburban, you know, town outrage to get hundred thousand dollar bill from Carrier because teenage daughter is sending sixty thousand text messages, you know, in a month. And so that was all in the US. But then as you said, in many countries around the world. especially in Europe, but but lots of countries around the world. It was still it was either A meter per message. um fee that consumers were paying. But then think about like a a continent like Europe where There are lots of countries all together. They're like states in America. You know, people are texting and have friends like

48:08 twenty miles away that are in a different country. You're paying a tariff. Tip. go outside of your country, it's costing you like five dollars a text message to text your friends. So here's WhatsApp out there and they're like Even for ninety nine cents.

48:22 For the app. Right. That's an amazing value proposition. It's this m magical arbitrage opportunity where they could say we could basically provide the same service, if not better. Because No limit on characters. Right. All the way the business models are set up is for this

48:38 Gorge consumers on SMS. And this new thing came out, the data layer, you know, the the the data network, which I don't so three G was new, is edge and three G, but it had just rolled out and and suddenly you could basically spoof the functionality of SMS just over the data layer. These moments like don't happen that often in the world at the scale that they happen here, where you can just you get like a six month window as a startup to be like, oh my God. the business model of the time is so misaligned with the technology that's available. We'll get to playbook later, of course, but I think this is a huge one of like there are these moments.

49:13 That happen with every you know, paradigm technology where You know, we've talked about it with the internet before, we've talked about it with a little bit with mobile where it's like Oh man. This is the window. It's only gonna be open for for short period of time.

49:29 But like if you can get through, you can Realize billions of dollars in value. They do this. They ship a I believe really fast. I think at like the end of two thousand nine they ship um the ability to add multimedia to WhatsApp messages. So photos Videos.

49:45 I think yeah, I think video came later, but definitely photos. Definitely photos. And so then and girls just Mm. goes through the roof. Now the VCs start banging, uh literally hanging. Literally hounding uh Jan and Brian.

50:02 Um and it's so funny the uh so now we're in twenty ten, towards the end of twenty ten. Um I I didn't realise this, you know, doing research. I guess one venture capitalist Jan doesn't say whom, um and what firm. literally gives them a blank term sheet. Like a term sheet with like the amount to be raised and the valuation blank.

50:21 And they say fill in the numbers. And um you know, this is so funny, unless thinking back on this time, you know, this is when I started Inventure. Series A's were happening at this time I was doing them. of like series A's were like three million dollars at like a eight million dollar post money valuation. And so for a venture firm to just literally give a blank term sheet.

50:46 This is right after the financial crisis is insanity. Uh, which of course they're they're non binding. So like, you know. Right, of course. But actually, interestingly though, and this is, you know, a a good lesson as much capitalist. That tactic backfires and Jan says, you know Brian and I talked about it and we were like You know, if these guys are that callous with other people's money, uh, do we really wanna like

51:09 Are those the partners that we want, you know, to be our, you know, board members and and advisors and our financial partner. And so they ultimately End up going with Sequoia, uh Sequoia Capital, and and Jim gets uh there and talks about why. Also the great quote from Jim as he's talking about this. He says, um he and Sequoia had looked at Yeah, they famously do this. They look at Every company in a emerging space they think of they're they have a thesis on a space, they go meet with everybody and he said, Yeah, we met with he says Pinger, Tango, Beluga, you know, Tick was getting started at this time, all the other messengers. Everybody was trying to get the Beluga, by the way.

51:45 got acquired by Facebook and became Facebook's messenger. Indeed it did. And he's like, but it was clear that WhatsApp was the leader. And he says, you know, when he finally got to talk to Yan and and Brian Uh he said this is the only time this has ever happened in his he's ever seen this in his mentor career. They were already paying corporate income taxes. Like they were profitable. So it's like here's clearly this is the product leader in the space. And oh my God, these guys are printing. Cash. Like I've never seen this. So he convinces them to they ultimately raise eight million dollars that Sequoia leads. I think it was hard to find them, right? Because they didn't put a sign outside their office. They weren't answering emails. They weren't answering phone calls. So I think Jim

52:24 like finds their address and drives there and is he's he's the one you're referring to that's like banging on the door saying like I really, really would like to talk to you. Yeah. And uh he talks about that he um Jan and Brian used to like to work out of the Red Rock Cafe uh in uh downtown Mountain View, um, which I've been to many times, famous spot in Silicon Valley Lore. Jim eventually gets to you know sits down with them and meets them at Red Rock and just starts like Answering all their questions and um you know, uh pitching them on why they should work together. So they do an eight million dollar round. At a s slightly lower than an eighty million dollar.

53:00 post money valuation. I believe Sequoia got somewhere between 10 to 15% of the company for this investment. Again, crazy for this moment in time. But Jan talks about why they pick Sequoia and and Jim and he says, you know, there are three reasons. One. All of Sequoia's past successes that we talked about in Part one, including Yahoo and the brand associated with that. Two kind of personal chemistry with with Jim. And then three, this is really important. And is gonna come back here in a second as we get into Facebook.

53:28 He said it was really important that they didn't meddle. He's like the business was working. We were printing cash. We were the clear l market leader. We were growing super fast all around the world. He said, Jim and Squay, they said to me like Look, we You know.

53:41 W you don't want us like w we're not gonna mess with you, you know. Things are working here. Like if they're not working, we can talk about it. But like we will help you and do whatever you need, but like you guys are doing a great job. I think that's just like so A so powerful in terms of what that sets up for uh relationship between a founder and a venture capitalist. Um But also like clearly that was so important to Jan and Brian. All throughout everything and and foreshadows what's about to come with Facebook here.

54:10 Yeah, when when others do start to to exert control. So this happens. And then they're off to the races by October twenty eleven. It was early twenty eleven when that round finally closes. By October twenty eleven, WhatsApp is processing over one billion messages per day. By the next year, August August twenty twelve. They grow to ten.

54:31 billion messages per day. That's exponential growth right there, one to ten billion in in one year. A few months later, by February twenty thirteen. Uh WhatsApp has about two hundred million active users around the world. And at this point.

54:46 Sequoia in secret at this point in time invest another fifty million dollars. in the company at a one point five billion dollar valuation for a company that, you know, they're making their one dollar, you know, a year fee that they're only charging in some countries. It's in the US, it's in the UK, I believe, it's in some other European countries, but nowhere else around the world are they actually charging for the app. But the clear the strategic value of this is just so high that uh the growth is incredible. Yeah, it's not like on on any multiple of of net income you're gonna any reasonable multiple you're gonna get to one and a half billion dollars. One of the fascinating things here is

55:25 You know Sequoia There's no one that invests between. So the last time Sequoia invested, it was seventy, eighty million dollars. They come in two years later with a a term sheet for a company that they're already basically the only investor in or the only institutional. They mark up their own deal and they're not shy about marking it up and saying, Hey, like we think this thing's worth two hundred million dollars now. They say, Nope, it's worth a billion and a half. And like of course the the growth of the company and there's lots of good reasons why you could justify that. The outcome certainly justifies that. Um but it takes, you know a a firm like Sequoia and a partner like Jim, I think, to be able to make that call, yeah.

56:04 Let's bring in another thread of the story. There was probably one specific thing that was giving um Sequen and do have a lot of confidence here. And that was before uh almost a year before that round took place. In the spring of twenty twelve. Yan.

56:21 Gets an email. With the subject line get Together. Question mark. And that email is sent from Mark.

56:29 Zuckerberg. That's interesting to start with. Um but uh I believe as the story goes, Jan kinda tries to stiff arm him. He's not really interested in meaning with Mark and famously they like totally resisted talking to the press. They didn't have a sign on the building. They weren't doing any of the Silicon Valley hype game. They really just wanted to focus on the product and growth. And most of the usage is international. People in the US use WhatsApp, but

56:54 By far it's much more dominant in other countries around the world. And so yeah, I'm trying to give Mark the the stiff arm. And Mark just keeps coming at him. And so at uh at at one point Jan Ford's the email chain to Brian and and to Tim Gats and says persistent as the story goes. So they decide to take the meeting.

57:17 There's one other fun thing to note here before we move on from the fifty million that Sequoia invested. Jan and Brian tell Jim, uh, by the way, we don't need your money because uh we never spent any of the original eight million. And uh after the deal closed, they they actually sent um I think a screenshot or a ph a photograph or something of the bank account before the financing that says like, you know, eight point one two five million or something like that to prove it to him that yes, we grew to fifty employees and we scaled and we didn't need to spend any of your money in the first place. I think it was actually it was over Eight point. Two five million because it was over the total amount of capital they'd raised all together, including the two hundred and fifty uh seed round.

57:59 But again before the before the fifty million dollar round Jan and and Zuckerberg and Zuck do end up getting lunch together. Nothing kinda happens, but Zuck makes it clear he's really, really interested in what WhatsApp is doing and there might be really interesting things that these two companies could two together and of course Facebook had

58:21 That's gone public and had a liquid public currency and Um I'm sure all of these things were stock may have been in quite the dip, but uh but still And that's probably actually why nothing happened at that point in time was the stock was in the dumps, but then as we've chronicled it, then then they bought Instagram and everything turned around and um the stock went. Way, way higher over the next year. Also over the next year, what that grows to over three hundred and then over four hundred million users. And so

58:50 Now we get to early twenty fourteen. They've done it. The Sequoia deal. The second Sequoia deal. And this is really interesting. There's only been very little reporting on this, so we have only a few tidbits to go on. But

59:05 Apparently Tencent, which at this point as we've chronicled, you know, and developed WeChat and owns WeChat and QQ before that, and they're the largest social and messaging app in China. Apparently ten cent. was Ready to do a deal to buy WhatsApp for in the single digit billions, high single digit billions. And the deal was pretty far along. And Pony Ma, the CEO

59:28 was scheduled to come over to California to finalize the deal. With Jan and Brian and Jim. Uh but he had to have back surgery. And had to delay the trip. And we're now in Faber Lake.

59:42 Late January, early February twenty fourteen. Period of time, I'm sure. What's happened. Uh, you know, and and Jan and Brian and Jim engineered all this. The

59:55 Kinda let it be known to two parties that things might be going on. Mark and Facebook. The other is Google. They had gotten to know Sundar, uh, who at that point in time was running Android, remember.

1:00:10 Uh Google. And They kinda let it be known to Sundar that something might be going on. Sunder gets them a meeting scheduled with Larry Page for Tuesday. February eleventh. twenty fourteen.

1:00:22 Somehow Facebook. And Zach find out. That this meeting is scheduled. And he gets Jan over to his house.

1:00:32 the Monday night before February tenth. In that Uh meeting. He says, No, we're serious.

1:00:40 About an acquisition. I know all your beliefs about Advertising and your product beliefs of WhatsApp and how committed you are to Privacy and Being independent.

1:00:51 And so here's the deal. We wanna acquire you. It'll be a big number. WhatsApp is going to remain independent. And now remember, Facebook can credibly say this, as we talked about on the show. They are the the the poster child for making these leave them alone acquisitions, you know, Instagram being uh number one here. And

1:01:10 Um it's gonna be most important. So there was like really gone well. And and he said, You know, I really want this to be a partnership, so much so that most of the We'll do most of the deal in stock. And you're gonna become a very large shareholder in Facebook, Yan, you personally. And we will make you a board member.

1:01:29 Facebook. Which is I think one of six or seven at the time. Yeah. And nobody else. The only Facebook employee board members are are Mark and Cheryl. And

1:01:41 Everyone else is a outside board member. So This is Pretty big. He really uh it's unclear if Facebook knew about Tencent. But they knew about Google and they really did not want Google to acquire WhatsApp. Yan says.

1:01:56 Okay. Interesting. Thank you very much. The next day, he and Brian go down to Google. They meet with Larry Page. You know, they talk for an hour. Have a nice conversation. Um

1:02:08 Unclear. their messaging world right now, because Google's launched some new form of messenger. I think it's like an annual tradition for them to launch a new messaging product. And so I think at this point, like GChat, I don't think was totally dead. But hangouts they were trying to double down on. It was before Duo and some of these newfangled ones, but like you gotta remember back at this time, people really felt that Or at least the tech press was obsessed with writing about the mobile messaging wars. Um and there are these deep dives on WeChat in China and WhatsApp's crazy growth and uh Facebook had acquired Beluga, I think, and launch Messenger at this point. And it was, you know, who will win this new is this the new app store? You know, is is messaging sort of the new app?

1:02:54 Like now we don't think of Google really as a messaging company, even though obviously tons and tons of messages are exchanged on Android all the time. They were very much still in this race for w what everyone thought was going to be the next user interface paradigm. Yep. Yep. And Failing at it. Uh like I said, annual tradition. Yeah. Annual tradition. In the meantime. Jan and and Jim and Brian, they're trying to figure out like, well, what's our number? What's this what do we think we're worth?

1:03:22 And Twitter had gone public recently and Twitter had a thirty billion dollar market cap And had fewer MAUs. Then WhatsApp. And of course Twitter had a very robust advertising business model at this point and WhatsApp had very little business model. But uh you know, they kinda look at each other and they're like, Well Twitter's worth thirty billion.

1:03:42 We're bigger than they are. We gotta be worth at least twenty million. And so they put this out to cut all the parties and Zuck bites. And so the next day. What's twenty of that? What's twenty of that? And the week goes on, and then by the end of the week, Friday, February 14th, Valentine's Day, that evening, Jan goes back on Valentine's. Also Jenny's birthday, by the way. Uh my wife Denny wonderful wife Denny's birthday. Dude, you are like ruining her uh uh her like two factor off security answers here. Yans's hose to like Totally, yeah. Everybody's birthday. We we're just all about birthdays here on Acquire.

1:04:26 So Valentine's Day. Mark and Jan have a romantic dinner at Zuck's house. I believe it was during that dinner that uh they hammer out the details and Zach puts nineteen billion on the table. And uh I don't know if he literally put nineteen billion on the table, but I think it was sixteen billion and then the next day they negotiated up to nineteen point four or something. Like there was something where there was an initial offer and then And it might be. It was sixteen billion dollar acquisition plus three billion dollars in

1:05:00 stock awards and retention grants for Jan and Brian. So that might have been What brought it up. They agree. Uh they shake hands, they hug, uh supposedly

1:05:12 Zuck says that this was F bomb exciting. And uh takes out a bottle of Johnny Walker Blue, which he knew Yeah, unloved. They have a shot. And then they hand it off to the lawyers. And so over the weekend, remember this is a Friday. Now, Mobile World Congress is coming up the next week. They want to announce this and get it done before Mobile World Congress. So they hand it off to the lawyers, and over the weekend, the lawyers

1:05:35 put everything together. Now It's super important. Zach just wants this done. It's super important to Jan and Brian that like they don't want advertising on WhatsApp. Facebook's an advertising company. And so they get their lawyers to put a claim in the documents that

1:05:52 Says If Facebook ever implements advertising on WhatsApp the the two of them, and this is where this the three billion dollars in retention and stock grants for them become super important, that they would get full acceleration of any vesting on that stock and that they could walk away with all the money. Which may have kept Facebook from Doing putting that on the roadmap until uh much more recently.

1:06:16 Exactly. And so I don't know If this was something that because the deal came together so quickly, Facebook didn't think hard enough about this, or they agree to it and thought, you know, whatever, we'll just Do it anyway. This is in the final documents. The Wall Street Journal did a big um that we'll link to in our sources, uh did a big um article about this.

1:06:35 that it actually made it into the final docs. And so it was part of the deal. The next week they announce the deal. Nineteen billion dollar total um consideration by the time the deal actually closed. Facebook stock had run up. Uh and it was uh twenty two billion in total value.

1:06:52 Twenty two. You know, what's another three billion between friends? Um at Mobile World Congress. Mark Zuckerberg gives a keynote speech. He talks all about the acquisition. He says that it's it's you know, WhatsApp gonna be independent, there's not gonna be advertising, it's really the vision is related to internet.org. It's that they're building like this suite of utility services for the internet. Particularly in developing areas outside the US where their monetization currently isn't working at all. It's all gonna be great.

1:07:20 And for a while things are great. No pressure to monetize. And before we move on, we should talk a little bit about the way the financial terms of the deal broke down. So y sure it's this uh sixteen gone nineteen gone twenty two billion dollar all in package. Four and a half billion of that is in cash. Close to fourteen billion of that is stock Facebook stock consideration for WhatsApp. So that goes to all shareholders, including their existing investors. Um you gotta remember the share price point held that stock. Exactly. I mean there were seventy seven bucks. Oh man. Seventy seven bucks a share. So today there'd be an an additional twenty five billion for the the combined total of those shares would be up another twenty five billion. You then go and look at the shares that were the RSUs given to um the founders when they when they came over to Facebook.

1:08:08 that would be an additional seven billion dollars today if they had held on to that stock. I don't think they did for philosophical reasons when they're gonna get into came out against Facebook, but like, oh my gosh, what Facebook was giving up here, and we'll talk about this in the grading I don't think you should think about is the cash value. I think you should think about as the percentage of their equity value, which is about 10%. Like they're a two hundred something billion market cap company at this point. They basically sold ten percent of the company in order to go and get this asset.

1:08:41 And for reference, we'll talk about this in analysis later, but Facebook is a six hundred and thirty billion dollar market cap company today. Pretty wild. Totally wild. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow.

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1:10:42 We'll bring things on home here on the history and facts. At first things do go great. There's no pressure to monetize. Growth massively accelerates. They were four hundred ish million U MAUs at the time of the acquisition. Bye. August of that year in twenty fourteen, they hit six hundred

1:11:00 Also, that fall in 2014, importantly, they implement full end to end encryption and privacy within WhatsApp. January 2015, 700 million MAU. April eight hundred million MAU, and then by the end of the year they're at a billion users. Which then importantly makes them in twenty fifteen the most popular messaging application in the world surpassing We're the world. Yeah, surpassing WeChat. Which is still something I think is so under underappreciated today. Like WhatsApp is the largest messaging application in the world. Today they have one point five billion monthly active users. Yep. We talk a lot in the show about it's hard to grasp the scope of China scale, but like WeChat I as of I think the end of last year had like one point one billion users and it's kind of the like operating system for how people do things on their phones of all types, including messaging in China and like You know, it's forty percent bigger than that.

1:11:51 Yeah. Yeah. Now a very different business, as we'll get into. But some crack start to form. So you know, remember, Facebook had agreed to this no advertising thing and all this messaging. Behind the scenes though. Facebook is of course like Yeah.

1:12:05 Or an advertising company. That's why we're a that's our business model. That's what works on the internet, and that's why we're a huge, you know At this point hundreds of billions going to six hundred and thirty billion dollar market cap company. And yeah, WhatsApp like you should be part of that. Yan and Brian fight it. Apparently

1:12:24 It gets really heated internally. Apparently Charles Handberg keeps saying to them, It worked for Instagram and uh they keep uh rejecting Any participation in the ad ecosystem within Facebook. And importantly, that means two things. Not just showing ads on WhatsApp, that's actually at first the less controversial thing. It's about sharing user data, right? Sharing user data um from WhatsApp users with Facebook. And then Facebook has a highly sophisticated Ad targeting system across

1:12:55 All their properties, you know, core Facebook, Instagram, which is Instagram is on their hypergrowth trajectory at this point. Yeah. Messenger. everything else, they want to use all the data from Facebook to or from WhatsApp to help with targeting within those other products. And Jan and Brennan are like. NFW. Um so things start to get really heated. And of course, remember they instead that the at the time of announcement, even in a blog post by WhatsApp. that they would never do this. And Facebook to show they're really serious here, in January twenty sixteen, they say, Oh also yeah, that that that revenue model that uh, you know was um

1:13:31 so benevolent and scaling so nicely of one dollar a year. Uh yeah, it's gone. We're we're just making it free now. Yep. In May of twenty seventeen, the European Commission finds Facebook over a hundred million euros. for misleading it during the

1:13:48 Antitrust uh process during the buyout of WhatsApp. And saying that it falsely claimed that they weren't gonna To which Facebook responds something like Oh whoops we didn't mean to. Another interesting thing to note, right around the same time, uh status goes from being an away message like feature to looking exactly like stories that is just, you know, being rolled out in Facebook and Instagram and Messenger, uh, which is a product that happens to lend itself very well to advertising. Very well to advertising. You can see where the setup is going here. So in September twenty seventeen

1:14:28 Brian. It's like I've had enough. I haven't hit my air out yet, but I'm leaving.

1:14:33 He walks out. billions of dollars on the table. He leaves eight hundred and fifty million dollars on the table, but he tries not to. He tries to invoke and again W Wall Street Journal did a big investigative reporting on this. He tries to invoke the clause and he says You guys are implementing advertising. Seems pretty clear. I haven't hit my you know or not yet, but I'm gonna get acceleration here. And Facebook fights it.

1:14:58 And uh they're prepared to go to the man and finally Brian says, Look, you know. I don't need this in my life, I'm already a billionaire and He walks and he leaves eight hundred fifty million dollars. on the table, he immediately donates fifty million dollars to an organization called Signal that is essentially making an open source And to end encrypted WhatsApp competitor.

1:15:18 He becomes the executive chairman there, sets it up as a nonprofit. says, you know, they're funded in perpetuity and like everybody should Stop using Facebook own products. Um I totally did not realize. Like I've obviously I know about Signal, like m uh tons and tons of journalists use it, people that that it's it's sort of the one of the most widely accepted sort of private secure um messaging platforms on mobile had no freaking idea it was the co founder of WhatsApp that that sort of in his disillusioned post Facebook state

1:15:48 But disactly. He he gives the it it was not started by him, but then he gives he Turns it into a foundation. Gives them fifty million and and becomes executive chairman. Then in March twenty eighteen. The Cambridge Analytica scandal hits.

1:16:04 And Brian. You remember he left in September twenty seventeen. He sends out a tweet. That reads. Uh March twentieth, twenty eighteen.

1:16:12 It is time period. Hashtag delete Facebook. And then all the All the crap hits the pan. Uh Cheryl calls. You know, at WhatsApp and Facebook at this time. It's like, what the WTF? Um, you know, of course. Hey, do you know this guy? Can you talk to him? Yeah. But

1:16:31 He doesn't retract it. And in fact, Brian goes and does a big interview with Forbes He says quote, At the end of the day, I sold my company, I sold my users' privacy to a larger benefit. I made a choice on a compromise, and I live with that every day. Um Yeah, on my yeah. Yes, of course. It really seems like really beautiful people. But um uh but yeah, I mean that's uh that's where it goes in. So then April the next month. Jan announces on Facebook that he is also gonna leave WhatsApp and Facebook. He leaves about four hundred million on the table. And at the point where he leaves there, that's like that's like right when they hit one point five billion monthly. So like now they're just kicking the pants off of any other mobile messaging app and

1:17:12 And it's funny, you know, in his post when I saw this at the time and I remember this, I thought Oh man, Jan is just trolling Facebook because his post reads that he's going to, quote, take some time off to do things I enjoy outside of technology, such as collecting rare air cooled Porsches. working on my cards and playing Ultimate Frisbee. And I didn't know all that I know about Jan now at the time. And I was just like, Oh my God, this is such a troll. Like uh you know, I mean on the one hand good for him for doing this, but like the funny thing is though, I'm now feel like I'm so in Jan's head. I think he was totally serious. He actually is a nut like there's um I listened to a great podcast. Uh about like

1:17:51 Collecting rare Porsches. Like he's so into it. Like I think he was being dead serious. Uh that's it is crazy that he decided to get specific and say rare air cooled Porsches in the press quote. We'll link to this in the show notes, but um that is exactly like he doesn't like turbocharge Porsches. He likes naturally aspirated, he thinks it's the best. Like I I I had no idea until I found this podcast. There is a whole niche community of Porsche 911 enthusiasts that have like religious wars about, you know. Naturally aspirated versus turbocharged engines. It's amazing. You can have a religious war about anything, my friend. About anything. Um I think the moral of the story is podcasts are

1:18:31 the next platform for the internet. So he's gone And that kinda gets us to today. I mean a couple things we'll cover, but WhatsApp continues to grow Hugely. Yeah, they did they did one other thing that's worth calling out during this time period in the last few years, and that's they launch uh WhatsApp Business, which is a second WhatsApp app that I installed on my phone that basically works.

1:18:54 a lot like WhatsApp. Uh, but if if you're a business and you're communicating with your customers through WhatsApp, this is a sort of optimized for business way to do it. Which Foreshadows some of the stuff that they they m potentially plan on doing with the app, but You know, I open this show by saying like they haven't done much. I mean they really haven't. Like they've scaled it. They've simplified the UI a little bit and they launched WhatsApp business.

1:19:17 So there are four quick things that have happened. Trying to launch WhatsApp business, which hasn't really has been kind of a failure to launch. Two, they tried to get into mobile payments in India. It's in beta, but it's been in kind of perpetual beta has also been. It's beta in frickin' twenty eighteen. Yeah. Like kind of early twenty eighteen. Um there's also regulatory issues. There's something like they built a data center to support like

1:19:41 five hundred million people using it concurrently, but it it got tied up in, you know, some terrible regulatory thing and and I on earnings calls recently they've said it's ready to launch. So like maybe we'll see it this year, but we'll see. Maybe but and this is one of the reasons we've waited so long to do this episode is, you know The messaging out of Facebook has been for years like Wait. Well now it's been Six years and like uh

1:20:08 You know. It's not here. Everybody in India right now or tons of people are using WhatsApp to message. We just make it easy for them to send money back and forth, then suddenly it's like Venmo or Square Cash. Then and and that doesn't have a business model, I should note. So they're going from something without a business model to something without a business model. And we heard this, you know, directly from Andrew Cortina when he joined us for the Venmo episode, like peer to peer payments. There's no consumer acceptable way to take a VIG on a c a peer to peer payment, but there is all about the merchant payments. From merchant payments, yeah, exactly. So you know peer to peer payments can be a way to bootstrap into merchant payments. Right. There's one more leap that they need to then take, which is hey, P all the consumers are exchanging money, let them pay at your store with this thing. But like we're still two leaps away from that.

1:20:53 Yep. Okay. So the next two things. That's sort of the most natural you know, one is Okay, fine. The founders are now gone. This clause doesn't apply anymore. You'd think that they would just implement advertising. At least in status, uh, which is the stories, you know, Snapchat. competitor that they baked into WhatsApp.

1:21:11 So they announced Facebook announced last year in twenty nineteen that they were gonna do that. They even showed prototypes of what advertising and stories on WhatsApp would look like. And Stories on WhatsApp are pretty popular. Like a lot of people around the world use them. As a matter of fact, on the Q Two earnings call this year, there's a quote from Facebook saying WhatsApp status is already the most popular ephemeral stories product in the world. Yeah which is a hell of a statement. Yeah, totally. Um Seems obvious, right?

1:21:38 Well, they just announced last week that they're not gonna do that. That they're pulling And all advertising from stories on WhatsApp. So back to no advertising on WhatsApp. And then this is where, you know, things really jump the shark. The final thing that has happened in the post founder exiting world is Libra and Calibra within Facebook. You know, which of course the Facebook's cryptocurrency efforts that were supposed to be, you know, the thesis was, Well, WhatsApp would make a lot of sense as a remittances platform for, you know, people use it to communicate. With trusted interpersonal

1:22:13 relationships between countries. Shouldn't it also be, you know, a really great platform for remittences and people have always said cryptocurrencies are Great for remittences, you can avoid all these tariffs. That makes sense, but like But we all know. Libra's a mess right now. I think they're being sued by the government. Um the I don't know the latest state of it, but seems unlikely that that is gonna be a viable business model any time soon.

1:22:35 Anytime soon is the the right thing there. I think th there's a variety of things that could still work out for WhatsApp, but the important takeaway, listeners, is we could not sit on our hands any longer before doing this episode and just keep hearing wait and see from Facebook on earnings calls. It's not happening in the near future. There might be something interesting. It might be with uh um paying businesses. It might even be tools for businesses to promote I I don't know. I I'm I'm not being articulate here because I don't actually have a really great thesis around this, but the thing to take away here is it's not gonna be very soon. Yeah. Okay, so I think this is the perfect transition to acquisition category. And this is the place to ask the question again that you asked at the top of the show, which is

1:23:19 Okay, what is this? Like Twenty two. No revenue six years later, effectively no revenue. What's going on here?

1:23:29 Yeah, David, before we we categorize it, I have two things to say. One is uh a thank you that I wanna issue as we get into the um the analysis here. Friend of the show, Turner Novak of Gelt VC, for helping us tremendously in how to think through analyzing this one. Uh Turner's a uh really smart person and in all things sort of consumer social, and we spent some time trying to try to figure out how to slice this one up. The second thing that I wanna say is I would love to quote for you how Facebook broke this down when they reported the acquis to their investors, which I think is really illustrative of of their thinking at the time. So They reported a seventeen billion dollar total sale based on the

1:24:11 price that they knew at the time. Two billion was for the users that they acquired. Half a billion dollars for trade names, so WhatsApp as a half billion dollar value brand out in the world. Um, a third of a billion for technology, okay. Uh, and then fifteen point three billion of goodwill. And I think that actually adds up to a little more than 17, but that's okay. So then uh they go on to articulate this is from the twenty fourteen annual report that goodwill generated from the WhatsApp acquisition is primarily attributed to expected synergies from future growth. from potential monetization opportunities, from strategic advantages provided in the mobile ecosystem, and from expansion of our mobile messaging offerings, which to me says fifteen point three billion of we have no idea. Like we just needed to own this thing. Now of course this is accounting treatment and Anybody who's you know

1:25:03 worked in investment banking or certainly accounting knows goodwill is you know it's just worry stuff. It's a plug. But but I think you're right. Like this is illustrative, you know I think they were thinking like, Yeah, yeah, yeah, this is gonna take a while and whatnot, but like I think Facebook was fully expecting that this was gonna be a cash flow monster, just like Instagram. Yeah. So listeners, if you're new to the show, the way that we categorize these acquisitions are people.

1:25:27 Technology. Product. Yeah. Asset. Or other than the other.

1:25:33 And occasionally We we categorize it as uh as something that uh I'm going to elect to use today, which is a takeout. Which is it is worth a lot of our money to stop this thing from existing as an independent entity or in the hands of someone else, and we are willing to pay handsomely in the form of goodwill to make that happen. Yes, you could argue the asset of the users certainly wasn't the business line. Technology Lord knows Facebook could build f people, you know, there were fifty people that work there at the time, obviously some talented founders, lots of talented engineers, but my God, this thing was a takeout acquisition.

1:26:11 Yeah. Well. I I don't care who the people are, nobody is worth twenty two billion. Um so uh Yeah, totally. I take out our I was thinking, um Defensive, you know. Both in the moment of like Oh my God, we can't let Google have this. And whether they knew about Tencent or not, you know, the other thing is we've talked about in previous episodes.

1:26:32 Facebook was really trying to enter Mark was really trying to come up with a plan to enter China at this point in time. And uh he really believed that China was gonna be the next frontier for Facebook. Man, if Tencent were to acquire WhatsApp, then that would be Terrible. No, of course Tenton ends up uh acquiring musically and building TikTok. So uh you know, Facebook won the battle, but lost the war here. Um

1:26:55 Uh but yeah, I think like defensive. And then fast forward to now and Yeah, like things are Pretty sad, the state of affairs as we just described. On the other hand. This gets into if you're ready to move on to what would have happened otherwise.

1:27:09 What if WhatsApp had you know? Certainly we just talked about what would have happened if Google or Tencent or somebody else had acquired them. But I think the bigger threat is what if WhatsApp had remained independent. Wood. It in this world now where like everybody's so Privacy motivated. Mark Zuckerberg has said once he decided not to enter China that like his vision for Facebook is a privacy oriented world, right? Like a Ben Thompson phrase there. That's a massive strategy credit. It's like Yeah, yeah, yeah, yeah. Privacy is super important to us. Kind of.

1:27:41 Except when it comes to ad targeting. But to be fair, they keep all the data to themselves. Like they they by virtue of owning the entire end to end experience, they they never um well, I mean they don't they don't exchange it with third party ad network or other websites or that because you spend so much time with them, uh, they own the data end to end. Yep. Absolutely too. But it would be it'd be interesting if there were a viable third, you know, standalone independent public company which WhatsApp would certainly be at this point. You know, that were uh

1:28:12 A different vision of what Lessers all You know, app. Looks like. Would they have figured out some of these business models?

1:28:20 That we talked about along the way independently. You know, w I don't know. I don't know. A lot of execution risk there. But um Certainly would have been. You nailed it. This is the real crux of grading. It's it's not so much about What what is Facebook gaining by owning it? It's how much are they decreasing their risk of having no value in the future? by by this thing existing.

1:28:43 Facebook's entire business is maintaining attention share. So long as you are spending your time and attention with Facebook. they're gonna keep printing money at at to the tune of forty five percent operating margin, twenty plus billion dollars of profit a year. It's a freaking cash machine. And so Uh well they'll have to squint to your point and execution risk, but

1:29:09 There could be this thing that leverages all that connectivity that people have with each other, and they're exchanging messages, which isn't so different than sort of public posts, and they're exchanging statuses, which isn't so different than the way that we started with wall posts, it could evolve into a thing that steals attention share. And the what would have happened otherwise way to think about this is they could have been independent and they could have sort of uh evolved into their own social network, or to your point earlier, Google could have bought them and that would have been catastrophic, because I think Google would have been sort of the only formidable ones, as you mentioned, who could have paid up, but then also who would have executed a sort of attention grabbing strategy there. And so w to wrap this, I think my little rant here is You know, uh what would have happened, uh a billion people could have shifted attention from Facebook to WhatsApp, but I'm gonna hold off right now on trying to put a price on that uh until we get to grading. Well I wanna go one step further, which is like Okay, you know, yeah, all the slid logic.

1:30:08 You could say if you're listening. That doesn't add up, right? Like they The same thing could have been said more credibly about Snapchat. And Facebook wasn't able to buy Snapchat.

1:30:20 Zach only offered three billion. You know, things fall apart. Why you know, he certainly could have had Snap for Twenty two billion. That I I suspect. Now I don't know I don't know for sure, but like why didn't he put that twenty two billion on the table for Snap? Here's what I think is interesting.

1:30:40 Snap. Execution wise is a much clearer path to what we were just talking about. Like Advertising based network, super attention based, all that stuff. But it's a much smaller network. Um much, much smaller. WhatsApp is the largest, I I believe the largest network in the world. And it's global. I pulled some stats here. Those are all monthly active users. Facebook has two point four billion MAUs, YouTube has two billion, WhatsApp has one and a half, making it the largest messaging network. iMessage, which I think is an interesting one to consider here, is one point three billion. Facebook Messenger also one point three.

1:31:18 Yeah. Yeah, and it might be devices, not users. Uh Apple's a little a little tougher to read on that, but um an Instagram with a billion users and chat and uh WeChat right there at around one point one. So that's sort of the the second. Good question. Yeah. It but the important thing to know is today.

1:31:42 Snapchat's only three ten, Twitter's only three thirty. And I actually think TikTok may only be like five hundred million, but I I could be wrong on that. But that importantly, Twitter and Snapchat sub scale sort of networks when you're thinking global scale. So like I think that's that's an interesting point for us to consider in creating. Yeah, a lot of execution risk ahead for WhatsApp.

1:32:04 But They were the only kind of player out there that had the scale to really be a global threat. Yeah, and I mean it's it's really interesting to to think about. Of the what seven networks that have the seven social networks that have over a billion people, Facebook own four of them. Yeah. And of the others that are that high, YouTube is off the table. Google already owns it. My message.

1:32:26 No way Apple's gonna sell the most bundled product in the world, yeah. Yep. We chat, um you know, and and that's off limits'cause of you know the whole China issue. So yeah, WhatsApp's kinda the only You know, and they already own Instagram. Facebook already own this Instagram, so it's kinda the only one in play.

1:32:44 Yeah. Totally agree. Playbook? Playbook. Let's do it. Alright, so listeners, this is where we sort of analyze

1:32:53 what did this acquisition enable them to do, uh, them being Facebook and what plays or or what tactics um did WhatsApp and Facebook use along the way to become this behemoth that uh that it's beh become. So David, you wanna go first? Yeah, sure. I uh we've touched on a lot of them. The only the only one that I wanna highlight again is just the These magical moments that only come

1:33:17 Once every sort of platform shift or every you know, roughly every decade in tech, and who knows what the next one's gonna be, but These windows that open up where They're not obvious in the beginning. You know, again, remember Jan was he wanted this to be away messages, but like If you can get in there and figure out the right product.

1:33:37 There's an opportunity to just Serve. Such a clear need that a new platform enables and turnover. Um

1:33:47 The uh kinda you know, guard of of technology and and networks. Uh, that if there is one of those and you think you have one of those opportunities and you see it, like Good God take Brian's advice and do not give up. Go a couple more months. So funny, that was exactly um exactly the point that I wanted to make here. And specifically around both push notifications becoming available and also the wide widely available um data networks that lived on top of telephony and on top of SMS completely

1:34:19 obsoleting the way that all the carriers were billing for messaging at that time. Yeah, we didn't talk. As much about that. We hit on it a little bit in the beginning of the episode, but like Yeah, that's it's just such a disruptive business model of like I could pay

1:34:34 Ten thousand dollars a month for my, you know Child's Sixteen thousand text messages. I could pay a dollar a year. Yeah. Yeah, it's actually it's funny. So sometimes we do this section and I'd like to to do it today, uh, on value creation versus value capture. Cause a lot of companies are can create a ton of value in the world, but one of the sort of hard things to to do is make sure that you're able to capture some of that value you create.

1:34:58 WhatsApp didn't really try. Like WhatsApp created so much value. I mean, and and frankly, they destroyed tons of value for carriers. Um but until that's a little slightly debatable, I think. Okay. I think you're probably right. But Yan and Brian.

1:35:15 Got this question all the time. And they're kind of canned answer that they came up with was no no no we're actually helping carriers because we're encouraging people to adopt smartphones and move over to data plans, which data plans are more expensive than text plans. And I think it's fair. It's a it's a it's it's a fair argument, but it's flawed in that that was gonna happen.

1:35:36 Anyway. So it is worth noting too that carriers just figured out a way to bill everyone. Like they just repackaged all of their their their pricing. It's not like they actually materially lost uh lost money on this. Yeah. Um but like I don't I don't consider WhatsApp an effective value capture machine and still is not. Uh clearly.

1:35:57 Yeah. But massive value creation for the world. And and also again, we didn't talk about this as much, but The end to end encryption and being the first platform to implement that platform wide across everything. Um You know, nobody saw that.

1:36:14 coming in twenty fourteen, but in the world we live in today. Like I think that's really important and like really You know. Really good for the world that they did that. Totally agree. And to get into some of the nitty gritty of that, uh they actually then WhatsApp later implemented the signal protocol. Which is uh I believe also end to end encryption and finding.

1:36:35 Brian and the and the open source master and Yep. Facebook can read something like and and we're not privacy experts, but uh from sort of a cursory read over it, what really people that are really into privacy would want is Facebook to not be able to read, of course, the contents of your message, um, but also not be able to read like who sent what when. David if I sent you a a message on WhatsApp right now. Facebook would have it in their server logs, I believe. Listeners, please email us acquire at Fm at Gmail dot com or uh or tweet at us. Uh I believe they would know that I just sent you a message. Hm, interesting.

1:37:11 Which is Kind of what they One of the things they really wanted out of this anyway. There is more data they could get out of WhatsApp, but I I do think they get a good amount of data as it is today. Interesting.

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1:38:24 And now David. Grading. Oh, you're gonna make me go first. You won't go first. Well, okay, let's let's tee it up first. So what's what's the criteria? Like W what do we consider A plus? What do we consider an F. Well

1:38:39 Okay. Personally, anything in the A range is off the table just because I'm offended by the execution here. Uh but um uh but that's just me. I think you could still make an argument it's in the A range. I think the criteria by which I at least am gonna grade is like how important was this defensive move and how Valuable was it?

1:39:03 Uh so taking the perspective of grading as we always do, from the acquirer's perspective. as Facebook. I think this is still probably either a B or a B plus. And they would maybe people there would argue it's in the A range. Just by virtue of like, yeah, yeah, yeah. They gave up ten percent of their equity value, but they took out the one viable global network in this generation that could have been independent, the stock has gone from two hundred billion in market cap to six hundred and thirty billion market cap in the intervening six years. Of course, in many ways due to not WhatsApp, but like just the by virtue of having the Clear runway to do that has been Good.

1:39:43 For Facebook. Very, very good for Facebook. Pains me to say this because I wanna give it an F, but um but that's that's my great Alright, well I'm glad I wrote down my grade before uh before I heard you say yours, so I uh I can be sort of unbiased here. Two things to keep in mind, listeners. Uh one, they sold ten percent of their market cap to be able to to buy this company. Another way to think about this is uh Facebook was i is a phenomenally profitable business. And another way to frame this is uh w they basically spent all of their twenty nineteen net income or profit to buy this company. So was it worth spending an entire year of profit to go and and and buy them.

1:40:24 I am gonna grade this an A. I don't think it's an eight plus. But I'm gonna grade this in A. is obviously the same sort of defensive play argument, but the way that I sort of think about it, it's like What are the key risks to Facebook at this point?

1:40:40 There's regulation. Like I think there's regulatory reasons that that th they could go away. There's obsolescence because attention shifts elsewhere. I mean y yes, they're real, of course. But if you look at history Uh, and obviously a lot of this will depend on the coming election and whatnot, but like Even you know, Ben Thompson talks about this a lot. The DOJ didn't kill Microsoft. I mean Microsoft's actually back and better than ever, but didn't kill the old version of Microsoft. Google killed the old version of Microsoft. Like

1:41:06 Um, regulation is such a slow process and technology moves so fast that is that a real risk? Right. So like, okay, so we're gonna say r regulation's not really their key risk. It's it's really fading into obsolescence and it's the thing that happened to social networks before them, and it's the the Facebook has a lot of core competencies, but their very, very most central is not fading into obsolescence. Like Buying Instagram, brilliant. You know, company saving move on multiple fronts, bought them another generation. I think WhatsApp is sort of this similar thing where, you know, they they carved off ten percent of their the value of their company to go get it, but like should they have done that? Absolutely. Should they do it again? They should go do it five more times. Every time there's the there's one of the seven, you know

1:41:52 billion plus user social networks or billion to be in the near future user social networks is up for sale, they should go make a whore crux and carve off a piece of themselves or do whatever they have to do to go and get that thing and keep their keep their dominant position. I mean it is like The the consumer sentiment couldn't be freaking worse on this company. based on a lot. I mean the there was delete Facebook, there's election stuff, there's there they're in trouble left, right, and center. And it is making more money than ever. There are more people using it than ever. Sure, growth has slowed, but like, oh my gosh, it's because they saturated humans on the internet. And I just think that this is such a complete and total no brainer and even if they never make a dollar off of WhatsApp to neutralize that threat and and get to continue to own the world's digital attention. I I think is is not invaluable, but is very, very, very valuable to them. And one way to sort of look at this is if you think there was a 10% chance that WhatsApp totally wiped out Facebook at some point in the future.

1:42:54 then it was break even to buy it even if they never ever generate any cash flow. I agree. I just can't bring myself to give it an A. That's not for like logical reasons. Two comments to add on to that. One in talking to a bunch of friends at you know at Facebook and former Facebook friends. Um In thinking about this episode.

1:43:14 Yeah, one thing that is a core competency. And I think from my understanding, really viewed as a core competency with within Facebook is Extremely robust competitive intelligence. Like they know this. They know ex everything you just said and they are paranoid about it.

1:43:32 What was that VPN app that they were using that they use for competitive intelligence to to help them understand? U on Vado or Navajo, yeah. And then they eventually bought it and then they got in four bunch of trouble'cause they were yeah. So that's one. And then two, you know, I think this brings up an interesting question, right? Like if You'll indulge me for a minute, given my um

1:43:53 Non logical from an investor standpoint discussion of why you can't get this in emotional being. On Facebook. Well, how should the public and how should governments think about Facebook? Is it more like a tobacco company than a technology company, you know? Like if you look at tobacco companies They are still Many, many billions, tens of billions of market cap.

1:44:18 Publicly traded companies. Because just like you've been saying, Ben, they are like wild cash flow monster producing machines. But they're also tobacco companies, right? Like they're also good at not dying. Right. I so I'm I'm not sure I'm ready to go so far and say like social media or Facebook is tobacco, but

1:44:37 Certainly there are some like questions about the societal good of, you know Data privacy, ad targeting. the emotional effects on people of social media and in particular Instagram and Facebook. Um You're looking at a guy who's number one time consuming app on his phone is Twitter. So Well, it's not a Facebook app. Yeah.

1:45:00 It's true. So Yeah, I mean maybe there's an L P show deep dive there somewhere of the uh Have someone come on and debate the The ethics of social media with us. I think that'd be super fun.

1:45:12 Let's do it. Man, well There it is. There's WhatsApp. We finally did it. I'm glad we waited this long.

1:45:22 Yeah, me too. It's not like we would have gotten any more information, but at least we know that Facebook wasn't uh going to effectively immediately gain any uh new cash flow out of it. Yeah. Well and I think by waiting this long too it also made It's super clear what this was really about. Had

1:45:39 If we'd done this episode two years ago, we probably would have graded this like much lower. Because we wouldn't have seen how important this defensive move was. That's interesting. Or at least I don't think I will. Yeah, maybe not.

1:45:54 Maybe not. Do you want to do car routes? Yeah, let's do carve outs. We haven't done them in a while. Good way to kick off season six. It is. You wanna go for it?

1:46:02 I'll go. This may come as a shock to you, Ben. I'm glad you're sitting down. I have been wear different sneakers. Uh recently. Dude, I almost did a sneaker carve out too and it was almost also not fly nits. Yeah. You know? What are you wearing? Uh I'm wearing rebook flow rides.

1:46:21 Uh float rides. They're Excellent. I I wear them both for running and for just around town'cause they're like Super stylish.

1:46:28 I love my I still have my fly nets. But A, Nike is like moving away from planets and free planets. Um the new ones are not good. No, they're they look terrible. Um they're like a really messed up back to the future.

1:46:43 These flow rides, they okay, so Sticker price. A hundred bucks. I got mine on Amazon for like sixty five bucks. Runner's world. Review this out I found out about them. Runners World reviewed these things and they were like

1:46:58 You're not gonna believe this. But these rebox are the best hundred dollar or less running shoe you can buy on the market. And so I was like, all right, great. I need some new running shoes. I'm gonna try that. I got them and I'm like These might be my everyday shoes. Like they're that good. Are they f float rides? Flow rides. There's there's a couple of different models. I'll link to the one that um that I got.

1:47:18 But yeah, I'm loving them. Pretty nice man. You sure you're not you're not rebuck endorsed, right? You didn't get uh you didn't get a deal. Uh working on that. Working on the two deal.

1:47:30 Hey, if Kanye can have a shoe deal, I think Acquired can have a shoe deal. Oh yeah, now we should get on that for sure. Okay, so my carve out. is a product category that I'm going to recommend uh because I don't know the brand. But I recently went to the iDoctor. I I wear contacts. After getting my contact fitting, I was talking to my eye doctor and she brought up uh do you have computer glasses? And I sort of seen other people with them, didn't really understand and got like totally sold on the value. And I've been wearing them in like absolutely love them. They do this interesting thing. I wear them over my contacts and what they do is they do two things. One, they change my

1:48:07 Where my eyes naturally are at rest to like eighteen inches in front of my face instead of being like off in the far distance, which is what my contacts naturally have them do. And I think what our eyes naturally would do if you don't require uh glasses or contacts, it makes it so that when you're staring at a screen you don't get eye strain from constantly having your muscle your eye muscle sort of tensed up to be like looking at something close to you. So like I find that working is much more comfortable and I can like read and write longer. Um the other thing that they do, so there's this like slight magnification from changing where the resting focus is. So the screen everything on the screen looks a little bit bigger. This is how you know I'm becoming an old person. Um the other thing is it uh it filters blue light. It doesn't really change materially the the color or the hues of what you're looking at, but it makes it kind of safer for your eyes, better for your brain, you can sleep more easily at night. They're awesome. I actually now feel very strange sitting down at my computer without wearing the glasses.

1:49:05 That's awesome. So how do they work? Are they So they're not prescription. It's just Or they are prescription. I think they are prescription, but they sell ones that aren't prescription. But basically it's they they have the two features. One is the blue light uh uh filtration and the other is um changing your uh resting um focus to be about eighteen inches from your face. So the

1:49:28 They're not designed for vision. Outside of working at computer vision correction, that would be like you correct everyone there, like Interesting. Correct. Yeah, I actually take'em off when I stand up to like walk to a meeting or something,'cause then it's kind of like freaky when you look all the way down the hall. It's not like as stark as uh not wearing your glasses or something like that, but it is kind of like a you gotta refocus your eyes aggressively to go look at something far away.

1:49:52 Huh. I'm gonna have to check these out because um A sounds like a great product and benefit. B, I've always thought that I might like Look good with glasses, but I don't Uh lucky I don't have abnormal vision. And I'm like I'm not gonna be that guy that's gonna wear

1:50:08 glasses for now I have an excuse. It does uh it makes you look really like big eyed though. Like kinda like bug, uh like what I'm wearing right now. I don't know if my eyes look bigger to you, but they uh I always like whatever I've seen. Yeah, like see it caught my reflection was like Whoa I'm huge. I didn't I didn't notice, but now that I'm looking, yeah, you look like a um you look like a Snapdrag filter. That's like what I've always wanted.

1:50:32 Oh I love it. Well that's a good Yeah. Listeners, uh, if you aren't subscribed and you like what you hear, uh you should, especially if you're listening in Apple Podcasts. We deeply appreciate you hitting the subscribe button and helping us, of course, get delivered to you every time that you want to listen to a new episode, but then also uh it really helps us in the uh iTunes technology charts. Um so uh hit that subscribe button if you like the show.

1:51:00 If you want to become a limited partner, uh subscribing gets you access to our bonus show where we dive deeper into the nitty-gritty of building companies, and you can listen by clicking the link in the show notes or going to glow.fm slash acquired, and all new listeners get that seven day free trial. With that. We will see you next time. See you next time.

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