Facebook announced Wednesday that it will acquire mobile messaging provider WhatsApp, a five-year-old startup in Santa Clara, CA, for $4 billion in cash, $12 billion in stock, and another $3 billion in restricted stock units. So, $19 billion when all’s said and done.
The deal is eyebrow-raising on any number of levels. What made WhatsApp attractive to Facebook, clearly, was one very big number, its 450 million users, and one very small number, its 35 employees. It would be hard to think of any other company that has achieved a higher valuation relative to its size ($543 million per employee). But perhaps—just perhaps—such a price tag is justified by WhatsApp’s unheard-of ratio of users to employees, which is about 12.9 million to one.
On the subject of big numbers, how much is $19 billion, really? A few comparisons may be helpful. $19 billion is more than the gross domestic product of Honduras, Jamaica, Iceland, Nicaragua, and 80 other nations. It’s more than the annual revenue of 355 of the Fortune 500 companies. It’s equivalent to the net worth of hedge fund multibillionaire George Soros—and only 29 people in the world are worth more than Soros, according to Forbes.
It’s enough to fund NASA’s Mars Curiosity rover mission six times over. It’s roughly the amount Google has spent on its last 15 big acquisitions combined (that’s only counting the deals where the sale price was disclosed; in another 29 Google acquisitions over the same period, it wasn’t). It’s more than anyone has ever paid for a venture-backed startup. It’s very likely more than the sum total of all exits by technology companies in Boston, Xconomy’s original hometown, over the last five years (though again, deal amounts aren’t always published). It’s roughly the same amount that the bankrupt city of Detroit owes to all its creditors combined.
Which is to say, we aren’t talking about the real economy here. Only in today’s Silicon Valley could a company this insubstantial bring a price this fanciful.
There’s no point in asking, as so many have this week, whether WhatsApp is really “worth” $19 billion. An Uber ride across midtown Manhattan may be worth $200 to you if it’s New Year’s Eve and you dislike the subway. Mark Zuckerberg was willing to pay $19 billion to own WhatsApp, so that’s how much it’s worth.
A better question set of questions would be:
1. What does it mean for the rest of us when such a small company can create such a fantastic amount of value in such a short amount of time?
2. Is this kind of exit a sign that venture-backed innovation is working even better than we thought?
3. Can other startup founders, buoyed by WhatsApp’s success, hope to attain similar riches?
4. Should consumers now expect Silicon Valley to come up with even more time- and money-saving products and services?
My answers are not much, not really, definitely not, and maybe.
Let’s start by asking what kind of value WhatsApp really created. As with Instagram back in 2012, this is mainly the story of a tiny group of engineers taking advantage of open programming languages, operating systems, and mobile platforms (Erlang, FreeBSD, iOS, and Android, in WhatsApp’s case) to build a service that filled a niche and was effortlessly scalable. So scalable, in fact, that it scared Facebook into handing over 10 percent of its market value.
On its own, WhatsApp was a nice business, though not huge by Silicon Valley standards. After the free first year, users of the messaging app are asked to pay 99 cents per year. Let’s assume half of them do this. (The company hasn’t publicized its actual conversion rates, but most companies offering freemium services would kill to be able to convert even 10 percent of their free users to paying users, let alone 50 percent, so I think it’s a generous estimate.) Half of 450 million is $225 million per year. Not shabby for a 35-employee company.
But WhatsApp’s real superpower was not its revenue stream. It’s that the startup had entered a sector of supreme interest to Facebook. As Zuckerberg explained during a call with analysts on Wednesday, Facebook knows that it must become a mobile-first company to stay on top in social media. Millions of mobile subscribers around the globe want an alternative to pay-by-the-message SMS services (the all-you-can eat plans many Americans enjoy are uncommon in the rest of the world). WhatsApp was the largest and fastest-growing of these services.
And crucially, it was “the only app we’ve ever seen with higher engagement than Facebook itself,” Zuckerberg noted. (About 70 percent of WhatsApp users open the app once a day or more.) Facebook wants to make sure that all the time people spend texting isn’t time spent away from Facebook, but its own real-time messaging service, Messenger, has never really caught on.
Add up all those factors, and it made sense for Facebook to buy WhatsApp.
Here’s the thing: Facebook is just about the only company in the world with this particular set of goals and fears. And it has a lot of Monopoly money to play with. After a rocky post-IPO period in 2012, Wall Street decided sometime last summer that it loves Facebook after all. Now that it’s trading at almost $70 per share, it can put together all-stock or mostly-stock deals large enough to turn the heads of even the most idealistic startup founders.
(WhatsApp’s creators, Brian Acton and Jan Koum, complained on their company blog in late 2012 that “These days companies know literally everything about you, your friends, your interests, and they use it all to sell ads.” They even quoted that line in Fight Club that goes “advertising has us chasing cars and clothes, working jobs we hate so we can buy shit we don’t need.” They’re now part of a company that uses personal information to sell targeted ads for shit you don’t need, to the tune of $5 billion per year.)
There was one other company with the resources and the mobile ambitions to put together a multibillion-dollar exit package for WhatsApp: Google. And in fact, Fortune has reported, based on unnamed sources, that Google offered to buy WhatsApp for $10 billion. (According to the report, that offer didn’t come with a board seat for Koum, as Facebook’s larger offer did.)
My point is that WhatsApp’s “value” was only “valuable” to a tiny number of suitors, since they were the only ones in a position to act on it. So, yes, Ben Evans of venture firm Andreessen Horowitz is correct when he writes that “the widely discussed collapse in the cost of creating a startup in the last decade combines with both the much larger scale of mobile and the routes to market and virality offered by mobile platforms to mean that if you’re very good (and lucky) you can get to astonishing scale in a short time.” But then what? You better hope that what you built is interesting to Facebook or Google (preferably both at once), or valuations in the $10 billion to $20 billion range would be inconceivable.
That’s why I’d say the WhatsApp acquisition is an anomaly, rather than a case of venture-backed innovation firing on all cylinders. Sure, Koum and Acton are now billionaires, and Sequoia Capital’s ownership stake in WhatsApp, reported to be around 15 percent, means it’s in line for a $3.5 billion windfall, or about 60 times its investment. But as a couple of recent profiles of WhatsApp make clear, it’s all an instance of absurdly good luck. Koum and Acton didn’t originally set out to build a Wi-Fi-based instant messaging app, and their service only evolved in that direction after Apple changed its policy on push notifications in iOS in 2009 (giving developers the ability to make an alert pop up on users’ screens in response to events such as incoming messages).
You can’t arrange those sorts of accidents, which is why it would be so risky for other entrepreneurs to try to follow in WhatsApp’s footsteps. As a Bay Area-based technology reporter, I remember seeing the stars in startup founders’ eyes when Instagram fetched $1 billion, just two years after its creation. But the only other company to bear out those dreams so far is WhatsApp itself. I’m afraid that this latest acquisition will up the ante to a level that’s poisonously intoxicating and all but unattainable for other entrepreneurs.
Meanwhile, what does the acquisition mean for WhatsApp and Facebook users, and for technology consumers in general?
Well, in the short term, it means that all the data users trusted to WhatsApp—including everything in their mobile address books—now belongs to Facebook, and will likely be subject to Facebook’s ever-gyrating whims about privacy. In the medium term, it wouldn’t be surprising to see Facebook kill Messenger and replace it with a retooled or rebranded version of WhatsApp, or make new users log into Facebook in order to use WhatsApp.
In the long term, owning a 450-million-strong messaging network means Facebook will be in direct competition with mobile carriers. They’d probably like to hold on to their SMS businesses, but will find that more and more users are opting for app-based messaging and cutting back on their add-on services, the same way cord-cutters are dumping paid TV programming in favor of cable as a dumb pipe. I suppose that kind of competition could be good for mobile subscribers.
But it doesn’t mean that we should expect stunning new gains in the convenience or affordability of telecommunications. After all, as my friend Stever Robbins, a Boston-based executive coach, points out, instant messaging is 40-year-old technology—it only seems newer because startups like WhatsApp keep coming up with different ways to package it. “It is [from] our parents’ generation, and we hate to admit our parents did anything good, so if we reinvent it enough times on enough different platforms, that’s innovative!!” Stever writes, with more than a touch of sarcasm. I get where he’s coming from.
If you’ve gotten this far, you don’t need the TL;DR version of this column, but here it is anyway: $19 billion doesn’t mean much when it’s funny money that only Facebook or Google can afford to pay. It’s dumb to set out to build a company that Facebook or Google might want to buy, since even if you hit on something scalable, you can’t predict exactly what technologies they’ll want or need at the moment your thing scales.
Much better to try something totally new. And the timing for that may actually be good, since it’s clear now that Facebook can only get where it wants to go by acquiring other companies. It’s done innovating on its own, which means there’s room for someone to come along and wipe the game board clean.
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