Acquired - WhatsApp

Starting point is 00:00:00 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 because 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. That's insane i mean the fun the way to like think about that status like for every dollar they bring in house they keep 45 cents even after paying for everything all their fixed costs all their employees it's just a cash machine that's why it's a 630 billion dollar market cap yep Welcome to Season 6, Episode 1 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.

Starting point is 00:01:02 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, that's right, David, abandoning near-term efforts to enable advertising in WhatsApp, which of course is Facebook's core business model. You said $22 billion, right? Billion. Just to make sure we're on the same page. That's 22 Instagrams right there. So today we will decide, was this one of the worst acquisitions of

Starting point is 00:01:34 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 because I think they're really good arguments to be made on both sides. This is as classic as a classic acquired episode gets. We have more than five years of hindsight. 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 sense. So it's going to be fun to tell the WhatsApp story from the very beginning. And as you said, debate that very question.

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Starting point is 00:03:58 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. Let's dive in. You know, there's something funny about messaging apps. I'm just thinking, looking at our script here and where we're going to start and how we started the Slack episode with Dharma Butterfield, soon to become Stuart Butterfield, growing up in a commune in British Columbia. There's something about communism and messaging apps. I don't know

Starting point is 00:04:38 what it is, but it just makes for, it's a really good breeding ground for founders of messaging apps. And of course,. It's that strong community. It's that strong community. of Kiev, where a boy named Jan Koum is born to a Jewish family in 1976 in this village in the then Soviet Union. And this is a pretty not great time to be all of those things. A Jewish child in Ukraine in the Soviet Union under communism in the mid-1970s. And Jan actually kind of later talks about this and he says of his time in 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 20 degrees Celsius, where little kids have to stroll across the parking lot to use

Starting point is 00:05:42 the bathroom. Society was extremely closed off. You can read 1984, of course, the book 1984, but living there was experiencing it. I didn't own my own computer until I was 19, but I did have an abacus. That was the reality that this young man, Jan Kuhn, was growing up in. And he would stay in Ukraine until he was 16 years old. 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 16, his mother and his grandmother and he were able to escape. This is in 1992. The Berlin Wall had fallen at this point.

Starting point is 00:06:32 They were able to get out of the country and come to America. So the three of them moved to Mountain View, California. Jan is 16 years old. He barely speaks any English. And when they arrive, his mom starts working as a nanny to support the family. But it's not enough. They live in government-assisted housing in Mountain View. They're on food stamps. Jan's dad never is able to leave the Ukraine. He very sadly passes away in 1997, never comes to America. And then even more tragically, you know, a few years after

Starting point is 00:07:06 that in 2000, we're going to talk much more about what happens before the year 2000. Jan's mom is diagnosed with cancer and passes away in 2000. So here's this, this guy, you know, now at the end of the day, in the end of this story, you know, Jan walks away with nearly $7 billion 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. That is a very soft way to describe a very hard, hard existence. So when he comes to America, like I said, he doesn't speak much English. I mean, he enrolls in American high school in California. He doesn't get along with

Starting point is 00:07:46 the other kids there. He's had a lot of trauma in his life. He's got this kind of one thing that ends up becoming a light in his life. And that he gets is that he's in Silicon Valley. This is the mid-90s. He gets really into computers. He actually teaches himself programming and computer networking by purchasing manuals from a used bookstore, a local used bookstore, and reading through them, teaching himself, 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 kind of through this. He joins, while he's still in high school, a hacker group online called WooWoo, W-0-0-W-0-0. That's Elite Speak WooWoo. Elite Speak WooWoo. And he ends up meeting after co-founder Sean Fanning through that.

Starting point is 00:08:35 And he's like, he kind of finds his community on the internet. After high school and through all this, he enrolls in San Jose State University in college. But college is kind of 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 at GSP at Stanford, there's still like, well, now in 2020, I don't know. But when I was at GSP, there's still a Fry's Electronics on El Camino Real in Palo Alto.

Starting point is 00:09:08 Yep. Jan works there. Then from there, he ends up working at an early internet service provider at local ISP. And through that, then he ends up actually joining Ernst & Young as a computer security penetration tester. So he's putting all of his like hacker cred to use even though he's a college dropout white hat yeah unclear you know white hat by day unclear what young was doing at night um this is where kind of everything changes so he goes to a conference while he's with Ernst & Young. And at the conference, this is now kind of mid-90s, he meets Yahoo co-founder David Filo. He's at an Apache

Starting point is 00:09:54 security conference. They kind of hit it off. And David's like, hey, 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 engineer, and he meets in his group when he joins a man who ends up, I think at first kind of becoming a mentor figure, and then a deep friend, a man named Brian Acton. Now, who is Brian? Brian has kind of a not quite as dramatic, but equally really interesting story. Brian was born in Michigan in 1972. I 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. Kind of incredible. This woman with a child just

Starting point is 00:10:49 running a freight forwarding business, I would imagine not a super female-friendly business in those days. Not the venture capital darling that freight forwarding is today. Yeah. This is way pre-convoy. And pre- Flexport. What pre- Flexport. What's the Flexport? Yeah. She then moves him to Florida and he spends most of his growing up years

Starting point is 00:11:11 in central Florida, I believe. She instills in him kind of this ethos of like both entrepreneurship and like small business entrepreneurship, but also like huge responsibilities of like beating payroll and like scraping by and getting, you know, getting through month to month. He ends up, he's super bright. He ends up going to Penn on a full scholarship to study engineering while he's there. And he's learning

Starting point is 00:11:37 about engineering in his freshman year. He first, you know, here's kind of about Silicon Valley and about this, you know this university called Stanford. He probably heard of Stanford before, but him and his background and nobody in Florida was thinking about going to Stanford. He ends up applying to transfer and is accepted into Stanford and transfers out to California his sophomore year and ends up majoring in computer science at Stanford. This ends up being huge for him. He interns at Apple his junior year. And then after graduation, he joins Yahoo as employee number 44 in the really early days. And he works super closely with David Filo. He works with Chi Lu and all these super legendary engineering leaders that end up coming out of Yahoo. Because

Starting point is 00:12:25 in a lot of ways, you know, Yahoo was the first, we haven't really covered it enough on this show yet, but it was the first like successful, successful, well, internet company. Yeah. Yeah. Right. Internet directory, basically. It's funny. Yeah. Yeah, you mentioned Chi Lu. So Chi obviously is very notable for his work at Yahoo. I know him as like my mega skip level boss from Microsoft when he ran Bing, because Microsoft recruited him over and he ran search for Microsoft and then ultimately actually took over all of office as well. Wow. And of course, you know, the relationship between Yahoo and Microsoft, many of our listeners probably know, is really long and complicated. A topic for another day. But Brian and Jan kind of become kindred spirits when Jan joins Yahoo.

Starting point is 00:13:16 And Brian really rises through the 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 Bartz talking about it all the time and then Marissa Mayer after she became CEO. And that was a massive project to re-architect all of the backend 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,

Starting point is 00:13:53 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 10 and then just plumbing plumbing when what did they what did verizon ultimately buy yahoo for i think

Starting point is 00:14:10 it was like three billion dollars or something i don't know but uh yeah 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 this business model of portal 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 makes a ton of product compromises in service of their ad partners. And that that was a big reason. They simultaneously through these years see the rise of Google. And Google famously is just like that these days, just one white page with a search box on it. Meanwhile, Yahoo's throwing up all of these display ads and doing all this stuff and they

Starting point is 00:15:05 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. And so I think there's this sort of incredible book ending of the story. Well, that's where I was going to be going with it. And it's also during this time, famously, that Yahoo tries to acquire Facebook for a billion dollars. Is this when Mark cried in the bathroom after rejecting it? I think so. I think so. Yeah. And, you know, this is going to 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

Starting point is 00:15:51 big company that was built to do that 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 when he was leaving yahoo and then the first couple of years of WhatsApp, he described his last three years at Yahoo, you know, his sort of like description on LinkedIn of your role and what he did. He said, did some work, period. And of course, they were working on Project Panama. In November of 2007, Brian and Jan have finally kind of had enough and they both leave right at the same, I think it may even been the same day that they leave Yahoo. And they're just like completely burned out. They both decide they're going to take a bunch of time off. Brian had

Starting point is 00:16:37 recently been through a divorce, you know, and Jan had had such a hard life up into that point, lost his parents in the past few years. So they say, 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. We're in 2008. And they are both rejected for jobs at Facebook. Brian even tweets about it. Facebook clearly does not need their talents or ideas. Which is so funny because they are, especially Brian, but both of them, especially Brian,

Starting point is 00:17:19 truly world-class 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 is benevolent now, but whereas Google was hiring a lot of the smartest people who were academic and sort of obsessed with really like pedigreed, right? 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 frankly, there was a lot of like, there was a lot of not invented here sort of syndrome. And

Starting point is 00:18:02 there was a lot of you're not good enough for us. And we are sort of, 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,

Starting point is 00:18:16 was, you know, not, um, not welcomed and not revered. It's really interesting. I wasn't going to get into this in a history. In fact,

Starting point is 00:18:23 but it's worth a, worth a pause. Most of the backend of WhatsApp ends up getting written in erlang which is like this super obscure programming language that was actually developed by erickson in like the 80s maybe erickson the big telecom nordic telecom giant 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 and of course now if you start your company and and write it in

Starting point is 00:18:58 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 specifically obsessed with things like erlang and rust and very like more up-and-coming and or fringe programming languages but gosh you have to get specific then and you're hiring when you make a decision like that yeah so okay back to picking up the story jan he's single he's traveling around remember, he's got this history of he was a hacker. He was a woo-woo member. And it started as a pen tester. He is traveling around to lots of countries,

Starting point is 00:19:33 and he has a Nokia candy bar phone that he loves. He really loved the old, he still talks about how he loves the old Nokia phones. Dude, you could play Snake. It was great. It was great it was great and he had of course jailbroken this phone and installed all sorts of like super hacker you know dev tools on it that you can monitor everything that's going on on 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 countries and swap them in.

Starting point is 00:20:06 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 phone too. Like there are all these country codes you've got to dial. 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 that the country code in argentina is just like so ridiculous

Starting point is 00:20:39 that he's like dropping all these messages and he starts getting 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 2009, his birthday is in February. But he's just hanging out and he says, you know what? I'm going to buy myself an early birthday present. I'm going to buy an iPhone just to like hack around with. And of course, the iPhone had come out in 2007. But 2009. I think this would have been the iPhone had come out in 2007, but 2009...

Starting point is 00:21:05 I think this would have been the iPhone 3G. Either the 3G or the 3GS. I think probably the 3GS at this point. I think July is when the 3GS came out, if memory serves. So maybe it was the 3D. But Apple had just, I believe

Starting point is 00:21:21 it was in January of 2009, they had just announced the SDK to allow developers to make apps. And I think it wasn't even like apps weren't, the App Store wasn't going to ship until the summer, but the SDK was out there. Yeah, I think that's right. It may have been earlier, may have been at WWDC 08, they announced it. But yeah, 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 going to hack around on this. So he's got all this stuff

Starting point is 00:21:54 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 good buddy of Jan's. Hey, you know, I've 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 the equivalent of an away message and all my friends could know what I was doing and that I was okay. I'm just going to build this out on this new iPhone that

Starting point is 00:22:30 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? Uh, I just want, you know, this to be like the answer to what's up. So I'm just going to call it WhatsApp. And Alex was like, yeah, great idea. And so Jan's thinking some more and he says, you know, okay, well two things, one aim and ICQ and all these messaging services on the desktop, there's kind of this issue with them, which is you have a cold start problem with the network. You know, you join, but none of your friends are on there. And so you got to convince people to go convince all their friends to join. But with phones, you know,

Starting point is 00:23:17 I'm really, I'm digging into the, this new iPhone. Well, it wasn't even called iOS yet at this point, right? It was like, I forget what Apple is, iPhone OS SDK. And it's pretty locked down, but there's one 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. No, absolutely not. You just access it. Reach right in. prompting for that. You just access it. Reach your hand into the cookie jar. And he's like, man, what do you think if instead of having screen names and usernames, we just use phone numbers? Because all of the phone numbers of people you have, you're only going to give your

Starting point is 00:23:57 phone number to somebody you really want to communicate with and that you'd want them to know what your status is. so this might solve that cold start problem and so i was like yeah that that seems good but you know you're there's one thing you're going to need like yeah i'm like you're great developer you work to yahoo and everything but you don't really know how to you know code for ios but it just so happens through another you don't know this 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 that Next is the core of Objective-C and Swift now.

Starting point is 00:24:35 Still one of the greatest acquisitions of all time. Still. That'll have to go on our forthcoming acquired top 10 list. Yeah, wait. So before you get into hiring the iOS dev, did they grow by texting all of your friends? Like did they did they reach in, grab the phone numbers out of your address book and then like carpet bomb? Or how did that work? That's a good question. I don't believe so. I didn't find anything that they did like the LinkedIn playbook of actually go the step

Starting point is 00:24:59 further and 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 on the whatsapp years ago it checks and then they surface for you like oh hey i think it even shows you your whole address book and then like checks like these are the people that are 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 solomenikov i think i'm pronouncing that right and so yan's like cool

Starting point is 00:25:47 he contracts up igor they code up an app this you know away message app and they're getting ready to ship it and yan'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 because we're now in yeah if i remember right i think that they announced the sdk at wwdc oh which would have been june and then shipped it probably four months later three months later so it would have been out for a few months but they wouldn't have had push yet because that came in ios push is coming in a sec uh so no push. No push messages, no push notifications that third-party apps can provide. So Jan and Igor are ready to ship the app. And he's looking through the app store and he's like, oh, we need to incorporate this as a company because there are all these

Starting point is 00:26:38 developers. And remember back in... That's right. Well, Ben, you were probably doing this. You needed a Dunn's number. You needed a Dunn's number. You needed a Dunn's 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. Oh, yeah. You had to fax stuff to Apple. This is why I incorporated my first business, is because this was a requirement of the App

Starting point is 00:27:00 Store. Otherwise, your name was on it. Totally. So get this. Ben, you will totally appreciate this. So this is on Jan's birthday in 2009, February 24th. He's like, shoot, we got to incorporate this. He drives up to San Francisco. He had talked to an accountant friend of his. He was like, how do I incorporate a company? And the accountant's like, oh, no, don't worry about

Starting point is 00:27:20 it. Here's a template articles of incorporation in the state of California. There's five articles there. And he's like, just do a control H, find and replace and put WhatsApp instead of whatever I got here. Then you drive up to San Francisco, you go to the secretary 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, WhatsApp Inc. is born. Love it. Not exactly.

Starting point is 00:27:55 Usually, typically you're starting a startup. You have all these ambitions. You're like, oh, yeah, I'm going to go talk to Wilson Sincini. You're going to go talk to any of the great law firms out there. No way, man. They're going to incorporate us. Dude, my first app LLC was LegalZoom. Like, why not?

Starting point is 00:28:11 Well, you even use LegalZoom. Jan was just like, he literally scribbled some stuff on paper and did it by hand. So they get that done. They ship the app with these great expectations. Jan thinks it's going to be so awesome. And in his own words, direct quote, it fails horribly. And so what's the functionality at this point? It's just the statuses.

Starting point is 00:28:34 Like you can just say like, 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's literally just away messages, no notifications. If you happen happen to exactly like you said if you happen to open the app right and away messages seem like pretty useless unless someone's trying to message you right right i mean the the the literally the name of it is like i'm sending a message that I am away. So usage is horrible. But they pick up people registering and downloading the app. And this I thought was so fun.

Starting point is 00:29:11 It reminded me of these days. They do a pretty interesting growth hack. So there were so few apps in the App Store back then. And I remember this. I did this for years. I would check every week, what are the new apps? What are the new apps? Apple had the what's new section.

Starting point is 00:29:28 And Jan realizes, he's like, you know what? I can get a lot of people just trying this out. If every week I change the name of the app slightly, Apple will put me in the what's new section week after week. I swear this is what he did. Crazy. Totally crazy. And so as a result um he's getting all these users they're like trying it once being like this is stupid and stopping but he does have a bunch of people like he's at least getting that feedback he knows like he's been in

Starting point is 00:29:58 the valley a while and he's like all right gotta keep like working on it iterating on the product tries adding a bunch of features it doesn't really. One thing I forgot to mention from back in the Yahoo days, Brian and Jan bonded not just kind of over becoming friends and their ethos, but they also both are incredibly passionate about Ultimate Frisbee and they would play Ultimate Frisbee together. And so they go to a game together one day when Jan's working on this and he's talking with brian afterwards and he's like you know this is not working 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 he says, you'd be an idiot to quit now.

Starting point is 00:30:45 Give it a few more months. Keep working on it. And Brian's not actually involved with the company, right? Not at all. He's just a friend at this point in time. And Brian was working on his own startup at this point in time. I actually couldn't find out what that was,

Starting point is 00:30:58 but whatever it was, he eventually made the right decision to stop that. And this was, I mean, it's so funny. We haven't used the history turns on a knife point phrase in a while here. Maybe since Blockbuster. Yeah, maybe since Blockbuster. But like Jan was ready to quit. And if Brian hadn't told him to keep going,

Starting point is 00:31:17 he wouldn't have kept going long enough through WWDC 2009 in the summer when Apple introduces push notifications for third-party apps. Boy, is timing everything. Oh, man. Is it ever? The funny thing is, you would think, and in hindsight now, this is so obvious. It's like, oh, now

Starting point is 00:31:38 I can send, I don't have to rely on users randomly deciding 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 AOL Instant Messenger and ICQ instead of just away messages. Funnily enough, at first, Jan is 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. And we should take a moment here. I was fortunate to be living through this era and be very,

Starting point is 00:32:16 very obsessed with the iPhone as I was starting to create apps. So you might be wondering, why didn't AIM come to the iphone well they were like aim was an early early partner for apple yeah they they had an app on the app store very early i want to 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 a desktop right originally it was desktop but they they

Starting point is 00:32:56 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, I think AIM was like demoed on stage as this is a really good way to use notifications 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 necessarily a native feeling experience, but it also didn't have the sort of genius thing that, that Jan had with the network being based on phone numbers. Yeah. Nobody else had that. That was a major, major key to WhatsApp's success and ability to,

Starting point is 00:33:42 to outstrip all of the, you know the new entrants and AIM and Mebo and all these legacy guys transitioning. The other important thing to know about, remember about what was going on at this time was there was, are you going to say BBM? No, go for it. Oh, well, BBM, BlackBerry Messenger. There also was a playbook of how to execute messaging 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 CrackBerrys. And there really were two core use cases of BlackBerry, and I think people forget this. One was corporate email, and that's what now

Starting point is 00:34:23 when people think of and remember RIM and BlackBerrys, they think of that. But actually, no, a lot of consumers were using BlackBerrys. And the killer app was BlackBerry Messenger. And it was a fully featured mobile messenger, 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 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 BlackBerrys 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 one of my friends in college being like oh yeah no i i don't really i don't 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 slightly different feature set like you can see when things are red or not red but like it was the sort of like cool network to be on it was the the blue bubble. Yeah. So Jan's smart and Brian's smart and Brian's

Starting point is 00:35:28 kind of advising him at this point and their friend Alex is helping them. And they realized pretty quickly. And remember also they had this user base because they kept doing these growth hacks of changing the name and getting new people coming in every week. They had this user base and the users were like, guys, i really just want a message like these away messages are nice but can i can you please like to implement messaging yeah and they 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

Starting point is 00:36:04 of hacking it to make it a messaging app. And it's going out to everybody in their network. It was like WhatsApp and Twitter combined. Yeah, as I say, it's kind of like early Twitter. Yeah. Anyway, so they figured this out. Like, okay, great. We're going to build messaging into this.

Starting point is 00:36:20 They do. They launch it in like late August, early September of 2009, and it immediately takes off. Again, one, because 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 because 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 and so that's enough network density that people can start getting real 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 hey this is really working

Starting point is 00:37:15 like what do you think about coming and joining me full-time and like doing this for real and like let's raise some money and make this happen brian says yep i'm in this is now for real and like, let's raise some money and make this happen. Brian says, yeah, I'm in, this is now for real. I'm going to do this. And he says, I'm going to invest some of my own money from my Yahoo savings. And let's go round up a bunch of our former friends at Yahoo and put an angel financing together. So they put together $250,000 all from former friends and coworkers. Ryan joins the company officially. He gets, it's been reported roughly about a 20% stake in the company. Jan owns the rest of the company. And then I don't know what the valuation was on the seed round.

Starting point is 00:37:56 So the angel investors for their 250K obviously get a stake. And it kind of goes gangbusters from there. Jan, he says much later in a talk, he's very direct, as you would imagine, given his Ukrainian upbringing. He says, and he's so right, he's like, look, we were lucky. We stumbled into something that people found really meaningful. And what it was, messaging is the killer app for mobile. Period period, full stop. And it's true. It's come to bear in every country on every platform. Yeah, there's so many things that you can do on your phone.

Starting point is 00:38:32 And Matt Culler at Benchmark famously talks about the smartphone is the remote control for your life. And it's great. You can order a car to come pick you up and do all these things. But if you think about both, I imagine everybody listening to this, you personally, and certainly an aggregate, the population, you spend by far the majority of your time, forget Instagram, forget, you know, Uber, forget all of that

Starting point is 00:38:55 messaging with your friends. That's the real primary killer app for mobile phones. Do you consider Twitter to be messaging? That's a good question. No, I think it's different. I think it's social media. Maybe social media is near or equal importance. But if you think about what's... Definitely, this is true for me. I'm curious if it is for you. What is the most important thing?

Starting point is 00:39:17 I could live without Twitter on my phone, but I could not live without iMessage. My most used app by almost a factor of two is Twitter on my phone by amount of time spent over the past week. Interesting. And then mail coming in at number two. And messages is down probably at like number four. I do probably the most important communication in messages, but I'm in and out of it. I mean, 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.

Starting point is 00:39:47 And probably Brian and Jan would totally agree with that. It's not about time spent. It's not about that. But the most important conversations you're having in a messaging relationship. Once they figure this out, Jan then also talks about like before, in sort of the WhatsApp 1.0 version when it was just about statuses and away messages, it was just like Ben, you'd talk about

Starting point is 00:40:09 all the time about 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 as 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. 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 of their old Yahoo friends want to come work for them. Investors start beating down their doors. Like literally looking for them in unmarked locations and attempting to network their way to the founders. time. And I think this might have actually been Brian that kind of came up with this and advocated for doing it. So they were free. It was a free app in the App Store. But again, remember, think back to 2009. They're paid and free. You could do both in the App Store. And

Starting point is 00:41:17 it hadn't yet shaken out that free was the way to go. There were a lot of... Yeah. And there were certainly no in-app purchases or subscriptions. You could pay an amount of money to download an app or it could be free. Yep. And so Brian suggests, well, what if we charge 99 cents for the app in the App Store? That would do two things. 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 got to pay for server costs and remember they don't run on aws because they're using erlang and i think they ran on free bsd it's also 2010 like it's i don't know what services are available s3 and like maybe ec2 but like aws is not huge yet and and certainly not um

Starting point is 00:42:03 anyway cloud at all like yeah build a dynamically scaling apps are not are 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 and then two you know give us a business model and we can kind of control our own destiny 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

Starting point is 00:42:41 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, And that actually ends up being quite expensive 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 back end could catch up. That is some unbelievable product market fit right there. I know. I know. Unbelievable.

Starting point is 00:43:14 And so the other thing, though, yeah, they can charge 99 cents for the app because the value prop to consumers is unlike AIM and ICQ that are desktop, 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 would pay for like, I think I had to pay an extra $10 a month to get unlimited SMS.

Starting point is 00:43:40 Like there was some era in like 07 to 2010 where you would pay by SMSs and that was the dominant feature of phone plans and i think that's how it mostly was internationally but at least by like 2010 at&t and others had adopted this unlimited texting for a 10 add-on which can i i like paying 120 a year for texting it's ridiculous it's like yeah to go in a little bit of a technical aside here 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 there was an

Starting point is 00:44:26 extra, basically enough room for an extra 160 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 do this because it was just sending and receiving these extra 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. Well, and these were the days, all those news stories of middle-aged dad in, name your suburban town, outraged to get $100,000 bill from Carrier because teenage daughter is sending 60,000 text messages in a month.

Starting point is 00:45:09 And so that was all in the US. But then, as you said, in many countries around the world, especially in Europe, but lots of countries around the world, it was either a metered per message fee that consumers were paying. But then think about a continent like Europe where there are lots of countries all together. They're like states in America. People are texting and have friends 20 miles away that are in a different country. You're paying a tariff to go outside of your country. It's costing you like $5 a text message to text your friends. So here's WhatsApp out there. And they're like,

Starting point is 00:45:50 even for 99 cents for the app, that's an amazing value proposition. It's this 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 gorge consumers on SMS. And this new thing came out, the data layer, you know, the data network, which I don't, so 3G was new, it was Edge and 3G, but it had just rolled out. 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 happened here, where 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

Starting point is 00:46:30 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 that happen with every paradigm shift in technology where we've talked about it with the internet before, 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 going to be open for a short period of time but like if you can get through you can realize billions of dollars in value they do this they ship at i believe really fast i think at like the end of 2009 they ship um the ability to add multimedia to WhatsApp messages. So photos, videos.

Starting point is 00:47:10 I think video came later, but definitely photos. Definitely photos. And so then, and growth just goes through the roof. Now the VCs start banging, literally banging, literally hounding Jan and Brian. And it's so funny. So now we're in 2010, towards the end of 2010. I didn't realize this in doing research. I guess one venture capitalist, Jan doesn't say whom and what firm, literally gives them a blank term sheet, like a term sheet with the amount to be raised and the valuation blank. 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 in venture series A's

Starting point is 00:47:56 were happening at this time. I was doing them of like series A's were like $3 million at like a $8 million post-money valuation. And so for a venture firm to just literally give a blank term sheet, this is right after the financial crisis, is insanity. Which, of course, they're non-binding. Right, of course. But actually, interestingly though, and this is a good lesson as a venture capitalist, that tactic backfires.

Starting point is 00:48:24 And Jan says, you know, Brian and I talked a venture 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, do we really want to like, are those the partners that we want, you know, to be our, you know, board members and advisors and our financial partner. And so they ultimately end up going with Sequoia, Sequoia Capital, and Jim gets there. And Jan talks about why. Also, the great quote from Jim as he's talking about this, he says, he and Sequoia had looked at, you know, they famously do this. They look at every company in an emerging space. They think they have a thesis on a space.

Starting point is 00:48:59 They go meet with everybody. And he said, you know, we met with he says pinger tango beluga you know kick was getting started at this time all the other messengers everybody was trying to look up by the way it got acquired by facebook and became facebook 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 jan and brian he said this is the only time this has ever happened and he's ever seen this in his venture career they were already paying corporate income taxes. They were profitable. So it's like, clearly this is the product leader in the space. And oh my God, these guys are printing cash.

Starting point is 00:49:35 I've never seen this. So he convinces them to, they ultimately raise $8 million 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 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 and 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, which I've been to many times. Famous spot in Silicon Valley lore. Jim eventually sits down with them and meets them at Red Rock and just starts answering all of their questions and pitching them on why they should work together.

Starting point is 00:50:19 So they do an $8 million round at a slightly lower than an $80 million 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 picked Sequoia and Jim, and he says there are three reasons. One, all of Sequoia's past successes that we talked about in Sequoia part one, including Yahoo and the brand associated with that. Two, kind of personal chemistry with Jim. And then three, this is really important and is going to come back here in a second as we get into Facebook. He said it was really important that they didn't meddle. He's like, the business was working. We were printing cash. We

Starting point is 00:50:58 were the clear market leader. We were growing super fast all around the world. And he said, Jim and Sequoia, they said to me like, look, you don't want us like 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 a relationship between a founder and a venture capitalist. But also, clearly that was so important to Jan and Brian all throughout everything and foreshadows what's about to come with Facebook here. Yeah, when others do start to exert control. So this happens, and then they're off to the races.

Starting point is 00:51:40 By October 2011, it was early 2011 when that round finally closes. By October 2011, WhatsApp is processing over 1 billion messages per day. By the next year, August 2012, they grow to 10 billion messages per day. That's exponential growth right there, 1 to 10 billion in one year. A few months later, by February 2013, WhatsApp has about 200 million active users around the world. And at this point, Sequoia in secret at this point in time, invest another $50 million in the company at a $1.5 billion valuation for a company that, you know, they're making their $1 a year fee that they're only charging in some countries.

Starting point is 00:52:25 It's in the U.S., it's in the U.K., I believe. It's in some other European countries, but nowhere else around the world are they actually charging for the app. But clearly the strategic value of this is just so high that the growth is incredible. Yeah, it's not like on any reasonable multiple you're going to get to $1.5 billion. One of the fascinating things here is Sequoia, there's no one that invests between. So the last time Sequoia invested, it was $70, $80 million. They come in two years later with 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 basically the only investor in or the only institutional.

Starting point is 00:53:08 They mark up their own deal and they're not shy about marketing it up and saying, hey, we think this thing's worth $200 million now. They say, nope, it's worth a billion and a half. And of course, the growth of the company and there's lots of good reasons why you could justify that. The outcome certainly justifies that. But it takes a firm like Sequoia and a partner like Jim, I think, to be able to make that call. Yeah. Let's bring in another thread of the story. There was probably one specific thing that was giving Sequoia and Jim a lot of confidence here. And that was before, almost a year before that round took place in the spring of 2012, Jan gets an email with the subject line, get together question mark.

Starting point is 00:53:54 And that email is sent from Mark Zuckerberg. That's interesting to start with. But I believe as the story goes, Jan kind of tries to stiff arm him. He's not really interested in meeting with Mark. And famously, they 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 by far, it's much more dominant in other countries around the world. And so Jan's trying to give Mark the

Starting point is 00:54:25 stiff arm and Mark just keeps coming at him. And so at one point, Jan forwards the email chain to Brian and to Tim Getz and says, persistent, as the story goes. So they decide to take the meeting. There's one other fun thing to note here before we move on from the $50 million that Sequoia invested. Jan and Brian tell Jim, by the way, we don't need your money because we never spent any of the original $8 million. And after the deal closed, they actually sent, I think, a screenshot or a photograph or something of the bank account before the financing that says like, you know, 8.125 million or something

Starting point is 00:55:05 like that to prove it to him that yes, we grew to 50 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 8.25 million because it was over the total amount of capital they'd raised altogether, including the 250 seed round. But again, before the, before the $50 million round, Jan and Zuckerberg and Zuck do end up getting lunch together. Nothing kind of 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 do together.

Starting point is 00:55:43 And of course, Facebook had just gone public and had a liquid public currency. And I'm sure all of these things were implied. Stock may have been in quite the dip, 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 they bought Instagram and everything turned around and the stock went way, way higher over the next year. Also over the next year, what that grows to over 300 and then over 400 million users. And so now we get to early 2014, they've done the Sequoia deal, the second Sequoia deal. And this is really interesting. There's only been very little reporting on this.

Starting point is 00:56:25 So we have only a few tidbits to go on, but apparently Tencent, which at this point, as we've chronicled, you know, developed WeChat and owns WeChat and QQ before that, and they're the largest social and messaging app in China. Apparently Tencent was ready to do a deal to buy WhatsApp for in the single digitit billions, high single-digit billions. And the deal was pretty far along. And Pony Ma, the CEO, was scheduled to come over to California to finalize the deal with Jan and Brian and Jim. But he had to have back surgery and had to delay the trip. And we're now in late January, early February, 2014. During this period of time, I'm sure WhatsApp and Jan and

Starting point is 00:57:16 Brian and Jim engineered all this. They kind of let it be known to two parties that things might be going on. One, of course, is Mark and Facebook. The other is Google. They had gotten to know Sundar, who at that point in time was running Android, remember, at Google. And they kind of let it be known to Sundar that something might be going on. Sundar gets them a meeting scheduled with Larry Page for Tuesday, February 11th, 2014. Somehow, Faithbook and Zach find out that this meeting is scheduled and he gets Jan over to his house the Monday night before February 10th. In that meeting, he says, no, we're serious 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. And so here's the deal.

Starting point is 00:58:17 We want to acquire you. It'll be a big number. WhatsApp is going to remain independent. And now remember, Facebook can credibly say this 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 um it's going to be mostly two years since instagram so there was like two years since historical at this point yep and it really gone well and and he said you know i really want this to be a partnership. So much so that we'll do most of the deal in stock. And you're going to become a very large shareholder in Facebook, Jan, you personally.

Starting point is 00:58:52 And we will make you a board member of Facebook. Which is, I think, one of six or seven at the time. And nobody else, the only Facebook employee board members are Mark and Cheryl. And 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 um jan says 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 unclear and where's google

Starting point is 00:59:34 in their their 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 got to remember back at this time, people really felt that, or at least the tech press was obsessed with writing about the mobile messaging wars. And there are these deep dives on WeChat in China and WhatsApp's crazy growth. And Facebook had acquired Beluga, I think, and launched Messenger at this point.

Starting point is 01:00:11 And it was, who will win this new... Is this the new app store? Is messaging sort of the new app? Now we don't think of Google really as a messaging company, even though obviously tons and tons of messengers are exchanged on Android all the time. They were very much still in this race for what everyone thought was going to be the next user interface paradigm. Yep. Yep. And bailing at it. Like I said, annual tradition to launch a new one. In the meantime, Jan 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? And Twitter had gone public recently and Twitter had a $30 billion market cap and had fewer MAUs than WhatsApp. And of course, Twitter had a very

Starting point is 01:00:57 robust advertising business model at this point and WhatsApp had very little business model. But they kind of look at each other and they're like, well, Twitter's worth $30 billion. We're bigger than they are. We got to be worth at least $20 billion. And so they put this out to get all the parties and Zuck bites. And so the next day, Dan and Zuck get back together.

Starting point is 01:01:17 He's like, I just dropped a billion on Instagram. So what's $20 of that? What's $20 of that? And the week goes on. And then by the end of the week, Friday, February 14th, Valentine's day, that evening,

Starting point is 01:01:30 Jan goes back on Valentine's. Also Jenny's birthday, by the way, my wife, Jenny, wonderful wife, Jenny's birthday. Dude,

Starting point is 01:01:36 you are like ruining her, her like two factor off security answers here. Jan's is hosed. Like totally. Yeah. Jan's is hosed. Totally. Yeah. Everybody's birthday. We're just all about birthdays here on acquired.

Starting point is 01:01:51 So Valentine's day, Mark and Jan have a romantic dinner at Zuck's house. I believe it was during that dinner that they hammer out the details and Zuck puts 19 billion on the table. And I don't know if he literally put 19 billion on the table. And I don't know if he literally put $19 billion on the table. I think it was $16 billion. And then the next day they negotiated up to $19.4 or something. Like there was something where there was an initial offer and then they raised it.

Starting point is 01:02:18 It was $16 billion acquisition plus $3 billion in stock awards and retention grants for Jan and Brian. So that might have been what brought it up. They agree. They shake hands. They hug. Supposedly, Zuck says that this was F-bomb exciting and takes out a bottle of Johnny Walker Blue, which he knew Jan loved. They have a shot.

Starting point is 01:02:46 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. They hand it off to the lawyers. And over the weekend, the lawyers put everything together. Now, it's super important. Zach just wants this done.

Starting point is 01:03:04 It's super important to Jan and Brian that they don't want advertising on WhatsApp. Facebook's an advertising company. And so they get their lawyers to put a clause in the documents that says if Facebook ever implements advertising on WhatsApp, that the two of them, and this is where the $3 billion 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 putting that on the roadmap until much more recently. Exactly. And so I don't know if this was something that because the deal came together so

Starting point is 01:03:45 quickly, Facebook didn't think hard enough about this or they agreed 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, they're willing to in our sources, did a big article about this, that it actually made it into the final docs. And so it was part of the deal. The next week, they announced the deal. $19 billion total consideration. By the time the deal actually closed, Facebook stock had run up and it was $22 billion in total value.

Starting point is 01:04:16 $22. You know, what's another $3 billion between friends? At Mobile World Congress, Mark Zuckerberg gives a keynote speech. He talks all about the acquisition. He says that it's WhatsApp going to be independent. It's not going to be advertising. It's really the vision is related to internet.org. It's that they're building 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 going to be great. 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

Starting point is 01:04:52 deal broke down. So sure, it's this 16 gone 19 gone $22 billion all in package, four and a half billion of that is in cash. Close to $14 billion of that is Facebook stock consideration for WhatsApp. So that goes to all shareholders, including their existing investors. You got to remember the share price back then. If Sequoia had held that stock, I mean, their returns were incredible already. Exactly. It was $77 a share. So today, there'd be an additional $25 billion for the combined total of those shares would be up another $25 billion. You then go and look at the shares that were the RSUs given to the founders when they came over to Facebook. That would be an additional $7 billion today if they had held onto that stock. I don't

Starting point is 01:05:37 think they did for philosophical reasons when they both 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 200 something billion market cap company at this point. They basically sold 10% of the company in order to go and get this asset. And for reference, we'll talk about this in analysis later, but Facebook is a $630 billion market cap company today. Pretty wild. Wow. Totally wild.

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Starting point is 01:08:05 endpoint detection and response for the eighth consecutive season and the industry leader in managed detection and response again this summer. Yep. So if you want cutting-edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. Well, we'll bring things on home here on the history and facts. A couple of things that we'll go through quickly. At first, things do go great. There's no pressure to monetize. Growth massively accelerates. There were 400-ish million MAUs at the time of the acquisition. By August of that

Starting point is 01:08:47 year in 2014, they hit 600. Also that fall in 2014, importantly, they implement full end-to-end encryption and privacy within WhatsApp. January 2015, 700 million MAU. April, 800 million MAU. And then by the end of the year, they're at a billion users. Which then importantly makes them, in 2015, the most popular messaging application in the world, surpassing WeChat. The entire world. Yeah, surpassing WeChat. Which is still something I think is so underappreciated today. WhatsApp is the largest messaging application in the world. Today, they have 1.5 billion monthly active users.

Starting point is 01:09:22 Yep. We talk a lot on this show about it's hard to grasp the scope of China scale. But like WeChat, as of I think the end of last year had like 1.1 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 40% bigger than that. Yeah, yeah. Now a very different business as we'll get into, but some cracks 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, we're an advertising

Starting point is 01:09:55 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, know at this point hundreds of billions going to 630 billion dollar market cap company and yeah whatsapp like you should be part of that um jan and brian fight it apparently it gets really heated internally apparently charles sandberg 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.

Starting point is 01:10:29 That's actually, at first, the less controversial thing. It's about sharing user data, right? Sharing user data from WhatsApp users with Facebook. And then Facebook has a highly sophisticated ad targeting system across all their properties, you know, core Facebook, Instagram, which is Instagram is on their hyper growth trajectory at this point. Yeah. Messenger. Everything else. They want to use all the data from Facebook or from WhatsApp to help with targeting within those other products.

Starting point is 01:11:00 And Jan and Brian are like, NFW. 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 2016 they say oh also yeah that that that revenue model that uh you know was um so benevolent and scaling so nicely of one dollar a year. Yeah, it's gone. We're just making it free now. Yep.

Starting point is 01:11:27 In May of 2017, the European Commission fines Facebook over 100 million euros for misleading it during the antitrust process during the buyout of WhatsApp and saying that it falsely claimed that they weren't going to use data from WhatsApp to improve advertising and that they are.

Starting point is 01:11:48 So that was huge. To which Facebook responds something like, oh, whoops, we didn't mean to. That was a clear, that was some sort of oversight. They say it was not intentional. It was an oversight. Another interesting thing to note, right around the same time, status goes from being an away message-like feature to looking exactly like stories that is just being rolled out in Facebook and Instagram and Messenger, which is a product that happens to lend itself very well to advertising.

Starting point is 01:12:11 Very well to advertising. You can see where the setup is going here. So in September 2017, Brian is like, I've had enough. I haven't hit my earn out yet, but I'm leaving. He walks out. I'm so fed up that I'm leaving billions of dollars on the table. He leaves $850 million on the table, but he tries not to. He tries to invoke, and again, Wall Street Journal did a big investigative reporting on this.

Starting point is 01:12:37 He tries to invoke the clause, and he says, you guys are implementing advertising. It seems pretty clear I haven't hit my earn out yet, but I'm going to get acceleration here. And Facebook fights it. And they're prepared to go to the mat. 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 $850 million on the table. He immediately donates $50 million to an organization called Signal that is essentially making an open source and to end encrypted whatsapp competitor he becomes the executive chairman there sets it up as a non-profit says you know they're funded in perpetuity and like everybody should stop using facebook owned products which i totally did not realize like i've obviously i know about signal like tons and tons of journalists use it people that it that it's sort of the one of the most widely accepted sort of private, secure messaging platforms on mobile.

Starting point is 01:13:31 Had no freaking idea it was the co-founder of WhatsApp that sort of in his disillusioned post-Facebook state. But yeah, exactly. He gives the, it was not started by him, but then he gives, he he turns it into a foundation gives them 50 million and becomes executive chairman then in march 2018 the cambridge analytica scandal hits and brian you remember he left in september 2017 he sends out a tweet that reads on march 20th 2018 it is time period hashtag delete facebook and then all the all the crap hits the fan supposedly uh cheryl calls jan who's still you know at whatsapp and facebook at this time what the wtf um you know of course hey do you know this guy can you talk to him yeah but he doesn't retract it and in fact brian goes and does a big interview with Forbes.

Starting point is 01:14:25 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, on my yacht. Yeah.

Starting point is 01:14:36 On my yacht. Yes, of course. I mean, Brian really seems like, but Brian and Rian seem like really wonderful people, but, um,

Starting point is 01:14:41 uh, but yeah, I mean, that's, uh, that's where it goes. And so then Aprilil the next month jan announces on facebook that he is also going to leave whatsapp and facebook he leaves about

Starting point is 01:14:50 400 million on the table and at the point where he leaves there that's like that's like right when they hit 1.5 billion monthlies so like now they're just kicking the pants off of any other mobile messaging app and 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 cars 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 now feel like i'm so in jan's head i think he was totally

Starting point is 01:15:34 serious he actually is a nut like there's um i listened to a great podcast uh about like collecting rare porsches like he's so into it. Like I think he was being dead serious. 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 that is exactly, like he doesn't like turbocharged Porsches. He likes naturally aspirated.

Starting point is 01:15:59 He thinks it's the best. So like I had no idea until I found this podcast. There is a whole niche community of Porsche 911 enthusiasts like 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 the next platform for the internet. So he's gone. And that kind of gets us to today. I mean, a couple of things we'll cover, but WhatsApp continues to grow hugely.

Starting point is 01:16:32 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 WhatsApp Business, which is a second WhatsApp app that I installed on my phone that basically works a lot like WhatsApp. But 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 potentially plan on doing with the app. But I opened this show by saying they haven't done much. I mean, they really haven't. They've scaled it. They've simplified the UI a little bit and they launched WhatsApp business.

Starting point is 01:17:07 So there are four quick things that have happened. One is 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 sort of a-

Starting point is 01:17:21 It's been in beta in freaking 2018. Yeah, like early 2018 um there's also regulatory issues there's something like they built a data center to support like 500 million people using it concurrently but it got tied up in you know some terrible regulatory thing and and 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 monetization for whatsapp is coming well now it's been six years and like uh you know it's not here i just want to touch on this this

Starting point is 01:18:01 peer-to-peer payments thing like if you you run the playbook of 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. 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 directly from Andrew Cortina

Starting point is 01:18:20 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 peer-to-peer payment. It's 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.

Starting point is 01:18:35 There's one more leap that they need to then take, which is, hey, 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. Yep. Okay. So the next two things that sort of are the most natural, 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, which is the Stories Snapchat competitor

Starting point is 01:18:59 that they baked into WhatsApp. So they announced, Facebook announced last year in 2019 that they were going to 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 Q2 earnings call this year, there's a quote from Facebook saying, WhatsApp status is already the most popular ephemeral stories product in the world, which is a hell of a statement yeah totally um seems obvious right well they just announced last week that they're not going to do that that they're pulling any all advertising from stories on whatsapp so back to no advertising on whatsapp and then this is where

Starting point is 01:19:38 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 relationships between countries. Shouldn't it also be a really great platform for remittances? And people have always said cryptocurrencies are great for remittances. You can avoid all these tariffs. That makes sense. But we all know Libra is a mess right now. I think they're being sued by the government. I don't know the latest state of it,

Starting point is 01:20:21 but it seems unlikely that that is going to be a viable business model anytime soon. Anytime soon is the right thing there. I think 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 paying businesses. It might even be tools for businesses to promote.

Starting point is 01:20:49 I don't know. 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 going to be very soon. 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, okay, what is this?

Starting point is 01:21:10 Like $22 billion for no revenue six years later, effectively no revenue. What's going on here? Yeah, David, before we categorize it, I have two things to say. One is a thank you that I want to issue as we get into the analysis here to friend of the show, Turner Novak of Gelt VC for helping us tremendously in how to think through analyzing this one. Turner's a really smart person and all things sort of consumer social. And we spent some time trying to figure out how to slice this one up. The second thing that I want to say is I would love to quote for you how Facebook broke this down when they reported the acquisition to their investors, which I think is really illustrative of their thinking at the time.

Starting point is 01:21:55 So they reported a $17 billion total sale based on the price that they knew at the time. $2 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. A third of a billion for technology. Okay. And then $15.3 billion of goodwill. And I think that actually adds up to a little more than $17, but that's okay. So then they go on to articulate, this is from the 2014 annual report, that goodwill generated from the WhatsApp acquisition is primarily attributed to expected synergies from future growth, from potential monetization opportunities,

Starting point is 01:22:35 from strategic advantages provided in the mobile ecosystem, and from expansion of our mobile messaging offerings, which to me says 15.3 billion of, we have no idea. We just needed to own this thing. Now, of course, this is accounting treatment and anybody who's worked in investment banking or certainly accounting knows Goodwill is, it's just where you stuff, it's a plug. But I think you're right. This is illustrative. I think they were thinking like, yeah, yeah, yeah, this is going to take a while and whatnot. But like, I think Facebook was fully expecting that this was going to be a cashflow monster, just like Instagram. Yeah. So listeners, if you're new to the show, the way that we categorize these acquisitions are people, technology, product, business line,

Starting point is 01:23:20 asset, or other. And occasionally we, we categorizeize it as uh as something that 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. You could argue product. Yes, you could argue the asset of the users certainly wasn't the business line technology. Lord knows Facebook could build people. You know, there were 50 people that worked there at the time, obviously some talented founders, lots of talented engineers, but my God, this thing was a takeout acquisition. Yeah. Well, I don't care who the people are. Nobody is worth 22 billion.

Starting point is 01:24:15 So yeah, totally. It's takeout or I was thinking 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, 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 he really believed that China was going to be the next frontier for Facebook. Man, if Tencent were to acquire WhatsApp, then that would be terrible. Now, of course, Tencent ends up acquiring Musical.ly and building TikTok. So, you know, Facebook won the battle but lost the war here. But yeah, I think like defensive and then fast forward to now. And yeah, like things are pretty sad.

Starting point is 01:24:54 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. 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? Would 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? To use if WhatsApp were just- To use a Ben Thompson phrase there, that's a massive strategy credit. It's like, yeah, yeah, yeah. Privacy is super important to us.

Starting point is 01:25:29 Kind of, like the- Except when it comes to ad targeting. But to be fair, they keep all the data to themselves. Like they, by virtue of owning the entire end to end experience, they never, well, I mean, they don't exchange it with third party ad networks or other websites or that because you spend so much time with them, they own the data end-to-end.

Starting point is 01:25:50 Yep, absolutely true. But it would 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 a different vision of what a social, you know, app looks like. Would they have figured out some of these business models that we talked about along the way independently? You know, I don't know. I don't know. A lot of execution risk there, but certainly would have been a threat. You nailed it. This is the real crux of grading. It's not so much about what is Facebook gaining by owning it. It's how much are they decreasing their risk of having no value in the future by this thing existing. Facebook's entire business is maintaining attention share. So long as you are spending your time and attention with Facebook, they're going to

Starting point is 01:26:41 keep printing money to the tune of 45% operating margin, 20 plus billion dollars of profit a year. It's a freaking cash machine. And so by looking out in the world and observing WhatsApp and saying, we'll have to squint to your point of execution risk, but 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 evolved into their own social network or to your point earlier google could have bought them and

Starting point is 01:27:28 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 to wrap this i think my little rant here you know uh what would have happened a billion people could have shifted attention from Facebook to WhatsApp, but I'm going to hold off right now on trying to put a price on that until we get to grading. Well, I want to go one step further, which is like, okay, yeah, this line of logic. You could say, if you're listening, that doesn't add up, right? The same thing could have been said more credibly about Snapchat.

Starting point is 01:28:06 And Facebook wasn't able to buy Snapchat. Zach only offered $3 billion. You know, things fall apart. Certainly, if he was willing to pay $22 billion for WhatsApp, why, you know, he certainly could have had Snap for $22 billion. That I suspect. Now, I don't know. I don't know for sure. But sure but like why didn't he put that 22 billion on the table for snap here's what i think is interesting snap execution wise is a

Starting point is 01:28:33 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. Much, much smaller. WhatsApp is the largest, I believe, the largest network in the world. And it's global. I pulled some stats here. These are all monthly active users. Facebook has 2.4 billion MAUs. YouTube has 2 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 1.3 billion. Facebook Messenger also 1.3. I didn't realize iMessage was that big.

Starting point is 01:29:10 Yeah, and it might be devices, not users. Apple's a little tougher to read on that, but an Instagram with a billion users, and WeChat right there at around 1.1. Isn't TikTok hitting a billion-ish now?

Starting point is 01:29:27 Good question. Yeah. right there at around 1.1 so that's sort of the set hitting uh a billion ish now good question yeah that but the important thing to know is today snapchat's only 310 twitter's only 330 and i actually think tiktok may only be like 500 million but i could be wrong in that but that importantly twitter and snapchat subscale sort of networks when you're thinking global scale. So I think that's an interesting point for us to consider in grading. Yeah, a lot of execution risk ahead for WhatsApp. 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 really interesting to think about. Of the, what, seven networks that have, the seven social networks that have over a billion people, Facebook owns four of them.

Starting point is 01:30:10 Yeah. And of the others that are that high, YouTube is off the table. Google already owns it. iMessage. No way Apple's going to sell iMessage. The most bundled product in the world. Yeah. Yep. WeChat, you know, and Tencent, that's off limits because of, you know, the whole China issue. So yeah, WhatsApp is kind of the only, you know, and they already own Instagram. Facebook already owns Instagram. So it's kind of the only one in play. Yep. Totally agree. Playbook? Playbook. Let's do it. All right. So listeners, this is where we sort of analyze what did this acquisition enable them to do, them being Facebook and what plays or what tactics did WhatsApp and Facebook use along the way to become this behemoth that it's become? only one that i want to highlight again is just the these magical moments that only come once every sort of platform shift or every you know roughly every decade in tech and who knows what the next one's going to 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

Starting point is 01:31:25 product there's an opportunity to just serve such a clear need that a new platform enables and turn over um the uh kind of 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, good God, take Brian's advice and do not give up. Go a couple more months. So funny. That was exactly the point that I wanted to make here and specifically around both push notifications becoming available and also the widely available data networks that lived on top of telephony and on top of sms completely obsoleting the way that all the carriers were billing for messaging at that time yeah we didn't talk as much about that you know we hit on a little bit in the beginning of the

Starting point is 01:32:17 episode but like yeah that's it's just such a disruptive business model of like, I could pay $10,000 a month for my, you know, child's 16,000 text messages, or I could pay a dollar a year. Yeah. Yeah. It's actually, it's funny.

Starting point is 01:32:35 So sometimes we do this section and I'd like to do it today 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 do is make sure that you're able to capture some of that value you capture. Because a lot of companies can create a ton of value in the world, but one of the sort of hard things to do is make sure that you're able to capture some of that value you create. WhatsApp didn't really try. WhatsApp created so much value. And frankly, they destroyed tons of value for carriers. But until acquisition... That's actually slightly debatable, I think. Okay. I think you're probably right. But Jan and Brian got this question all the time, and their 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 tech plans.

Starting point is 01:33:19 And I think it's a fair argument, but it's flawed in that that was going to happen anyway. So, um, 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.

Starting point is 01:33:35 It's not like they actually materially 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. Clearly. They're capturing basically zero value.

Starting point is 01:33:50 But massive value creation for the world. 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. Nobody saw that coming in 2014, 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 facebook is the same thing as the foundation that Brian and the open source messenger. Yep.

Starting point is 01:34:29 Facebook can read something like, and we're not privacy experts, but 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, but also not be able to read like who sent what when. of your message, but also not be able to read who sent what when. David, if I sent you a message on WhatsApp right now,

Starting point is 01:34:49 Facebook would have it in their server logs, I believe. Listeners, please email us, acquiredfm at gmail.com or tweet at us. I believe they would know that I just sent you a message. Interesting. Which is kind of one of the things they really wanted out of this anyway. There is more data they could get out of WhatsApp, but I do think they get a good amount of data as it is today. Interesting. We want to thank our longtime friend of the show, Vanta, the leading trust management platform.

Starting point is 01:35:19 Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC2, ISO 27001, GDPR, and HIPAA compliance and monitoring. Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yep. Vanta is the perfect example of the quote that we talk about all the time here on Acquired, Jeff Bezos, his idea that a company should only focus on what actually makes your beer taste better, i.e. spend your time and resources only on what's actually going to move the needle for your product and your customers and outsource everything else that doesn't. Every company needs compliance and trust with their vendors and customers. It plays a major

Starting point is 01:35:58 role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product. Vanta takes care of all of it for you. No more spreadsheets, no fragmented tools, no manual reviews to cobble together your security and compliance requirements. It is one single software pane of glass that connects to all of your services via APIs and eliminates countless hours of work for your organization. There are now AI capabilities to make this even more powerful, and they even integrate with over 300 external tools. Plus, they let customers build private integrations with their internal systems. And perhaps most importantly, your security reviews are now real-time instead of static, so you can monitor and share with your customers

Starting point is 01:36:37 and partners to give them added confidence. So whether you're a startup or a large enterprise, and your company is ready to automate compliance and streamline security reviews like Vanta's 7,000 customers around the globe, and go back to making your beer taste better, head on over to vanta.com slash acquired and just tell them that Ben and David sent you. And thanks to friend of the show, Christina, Vanta's CEO, all acquired listeners get $1,000 of free credit. Vanta.com slash acquired. And now, David, grading. Oh, you're going to make me go first. You want to go first. Well, okay.

Starting point is 01:37:12 Let's tee it up first. So what's the criteria? Like, what do we consider A+, what do we consider an F? Well, okay. For me, personally, anything in the A range is off the table just because I'm offended by the execution here. But that's just me. I think you could still make an argument it's in

Starting point is 01:37:34 the A range. I think the criteria by which I at least am going to grade is how important was this defensive move and how valuable was it? 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 maybe people there would argue it's in the A range just by virtue of like, yeah, they gave up 10% 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 $200 billion market cap to $630 billion market cap in the intervening six years. Of course, in many ways due to not WhatsApp, but just by virtue of having the clear runway to do that has been good for Facebook, very, very good for Facebook. Pains me to say this because I want to give it an F, but that's my grade.

Starting point is 01:38:33 All right. Well, I'm glad I wrote down my grade before I heard you say yours. So I can be sort of unbiased here. Two things to keep in mind, listeners. they sold 10 of their market cap to be able to to buy this company another way to think about this is uh facebook was is a phenomenally profitable business and another way to frame this is uh they basically spent all of their 2019 net income or profit to buy this company so was it worth spending an entire year of profit to go and buy them? I am going to grade this an A. I don't think it's an A+, but I'm going to grade this an A.

Starting point is 01:39:11 And the reason I'm going to do that 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? There's regulation. Like, I think there's regulatory reasons that that they could go away there's obsolescence because attention shifts elsewhere i mean yes they're real of course but if you look at history uh and obviously a lot of this will depend on the coming

Starting point is 01:39:36 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. Google killed the old version of Microsoft. Regulation is such a slow process and technology moves so fast that is that a real risk? Right. So like, okay, so we're going to say regulation is not really their key risk. It's really fading into obsolescence.

Starting point is 01:40:03 And it's the thing that happened to social networks before them. And it's the Facebook has a lot of core competencies, but their very, very most central is not fading into obsolescence. Like buying Instagram, brilliant. Company saving move on multiple fronts, bought them another generation. I think WhatsApp is sort of this similar thing where they carved off 10% of the value of their company to go get it. But should they have done that? Absolutely. Should they do it again? They should go do it five more times. Every time there's one of the seven 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 horcrux 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

Starting point is 01:40:49 like the consumer sentiment couldn't be freaking worse on this company based on a lot i mean there was delete facebook there's election stuff there's 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 get to continue to own the world's digital attention, I think is not invaluable, but is very, very, very valuable to them. And one way to sort

Starting point is 01:41:27 of look at this is if you think there was a 10% chance that WhatsApp could have totally wiped out Facebook at some point in the future, 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 an A. That's not for logical reasons. Two comments to add on to that. One, in talking to a bunch of friends at Facebook and former Facebook friends and thinking about this episode, one thing that is a core competency, and I think from my understanding really viewed as a core competency within facebook is extremely robust competitive intelligence like they know this they know everything you just said and they are paranoid about it what was that vpn app that they were using that they use for competitive intelligence to help them understand or something like that on vato or on avo yeah and then they eventually bought it and then they got into a bunch of trouble because they were, yeah.

Starting point is 01:42:27 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 non-logical, from an investor standpoint, discussion of why I can't give this a name. Your emotional B.

Starting point is 01:42:41 Emotional B. You know, I think there's a legitimate question given all this and consumer sentiment on Facebook. How should the public and how should governments think about Facebook? Is it more like a tobacco company than a technology company? If you look at tobacco companies, they are still many, many billions, tens of billions of market cap publicly traded companies. Because just like you've been saying, saying ben they are like wild cash flow monster producing machines but they're also tobacco companies right like they're also good

Starting point is 01:43:10 at not dying right so i'm not sure i'm ready to go so far and say like social media or facebook is tobacco but 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 know 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 it's true so anyway yeah i mean maybe there's an lp 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 let's do it man well there it is there's whatsapp we finally did it i'm glad we waited this long yeah me too it's not like we would

Starting point is 01:44:05 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 i think by waiting this long too it also made it super clear what this was really about and if we had 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 would yeah maybe not maybe not do you want to do carve outs yeah let's do carve outs we haven't done them in a while good way to kick off season six. It is. You want to go for it? I'll go. This may come as a shock to you, Ben. I'm glad you're sitting down. I have been wearing different

Starting point is 01:44:50 sneakers recently. Dude, I almost did a sneaker carve out too. And it was almost also not fly knits. Yeah. You know, what are you wearing? I'm wearing Reebok float rides Rides. They're excellent. I wear them both for running and for just around town because they're super stylish. I love my Flyknits. I still have my Flyknits. But A, Nike is moving away from Flyknits and free Flyknits. The new ones are not good. No, they look terrible.

Starting point is 01:45:20 They're like a really messed up back to the future thing like these flow rides they okay so sticker price 100 bucks I got mine on Amazon for like 65 bucks runners world reviewed this I found out about them runners world reviewed these things and they were like you're not gonna believe this but these Reeboks are the best hundred100 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 going to try that. I got them and I'm like, these might be my everyday shoes. Like they're that good. Are they float rides? Float rides. There's a couple of different models. I'll link to the one that I got,

Starting point is 01:45:59 but yeah, I'm loving them. Pretty nice, man. You sure you're not Reebok endorsed, right? You didn't get a deal? Working on that. Working on the shoe deal. 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 because I don't

Starting point is 01:46:23 know the brand. But I recently went to the eye doctor. I wear contacts. After getting my contact fitting, I was talking to my eye doctor, and she brought up, 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 and like absolutely love them.

Starting point is 01:46:41 They do this interesting thing. I wear them over my contacts. And what they do is they do two things. One, they change where my eyes naturally are at rest to like 18 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 glasses or contacts, it makes it so that when you're staring at a screen,

Starting point is 01:47:06 you don't get eye strain from constantly having your muscle, your eye muscles 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. The other thing that they do, so there's this like slight magnification from changing where the resting focus is. So the screen,

Starting point is 01:47:24 everything on the screen looks a little bit bigger. This is how you know I'm becoming an old person. And the other thing is it filters out blue light. It doesn't really change materially 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. That awesome so how do they work are they so they're not prescription it's just or they are prescription they're it's i think they are prescription but they sell ones that aren't prescription but basically it's they have the two features one is the blue light uh filtration and the other is um changing your uh resting um focus to be about 18

Starting point is 01:48:07 inches from your face got it so the they're not designed for vision the like outside of working the computer vision correction that would be like you correct everyone they're like huh interesting correct yeah i actually take them off when i stand up to like walk to a meeting or something because 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 got to refocus your eyes aggressively to go look at something far away. Huh? I'm going to 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 like it. I don't have, I have normal vision that I might like look good with glasses but I don't lucky I don't have I have normal vision

Starting point is 01:48:46 and I'm like I'm not gonna be that guy that's gonna wear glasses for you have an excuse yes now I have an excuse it does it makes you look really like big-eyed though like kind of like bug like what I'm wearing right now I don't know if my eyes look bigger to you but they I was

Starting point is 01:49:02 like I've seen yeah like caught my reflection was like whoa eyes like I didn't notice if my eyes look bigger to you, but they, uh, I was like, I've seen, yeah, like see, it caught my reflection. I was like, whoa, eyes look huge. I didn't notice. But now that I'm looking, yeah, you look like a, um, you look like a snap tap filter. It's like what I've always wanted. I love it. Well, that's a good.

Starting point is 01:49:18 All right, let's bring it home. Listeners, uh, if you aren't subscribed and you like what you hear, 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, it really helps us in the iTunes technology charts. So hit that subscribe button if you like the show. If you want to become a limited partner, 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

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