This story appears in the March 24, 2014 issue of Forbes.
The subject line of the e-mail was like every other come-on that hit Jan Koum’s in-box in the spring of 2012. He was pounded daily by investors who wanted a piece of his company, WhatsApp. Hatched on his birthday, Feb. 24, 2009, WhatsApp was emerging as a global phenomenon. Some 90 million people were using it to text and send photos for free. No social utility had ever grown as fast. Facebook had only 60 million by its third birthday. And at the time close to half of WhatsApp users were returning daily.
Koum looked at the e-mail sender: Mark Zuckerberg. Now, that was a first. The Facebook founder had been using WhatsApp and wanted him over for dinner. Koum stalled, then finally wrote back saying he was traveling soon and dealing with server issues. Zuckerberg suggested they meet before Koum left. Koum forwarded the reply to his cofounder, Brian Acton, and his sole venture backer, Jim Goetz, a partner at Sequoia Capital, adding the word: “Persistent!”
Take the meeting, Acton said: “When someone of Mark’s status contacts you directly, you answer the phone.” Koum had lunch with Zuckerberg later that month at Esther’s German Bakery, chosen for its discreet back patio and location 20 miles away from Facebook’s campus. Over their meal Zuckerberg said he admired what Koum had built and hinted at his interest in combining their two firms.
So began the most lucrative two-year courtship in technology history, one in which admiration led to friendship and then, in a last-minute hurry, to an unprecedented transfer of wealth, all signed and sealed on the door of the welfare office Koum, 38, once haunted. Last month Facebook bought WhatsApp for $4 billion in cash, $12 billion in stock (8.5% of the company) plus $3 billion in restricted shares.
The deal cements Zuckerberg as tech’s new billionaire-maker. Koum, a shy but brilliant engineer who moved from Ukraine to the U.S. with nothing, will join the Facebook board and, after taxes, pocket $6.8 billion.
His cofounder, Brian Acton, a mild-mannered 42-year-old ex-Yahoo engineer who got turned down for jobs at Twitter and Facebook, will come away with $3 billion after tax. The deal, he says, has left him “astonished.” Sequoia Capital, the only venture firm to taste a part of this deal, walks away with $3.5 billion–a 60-fold return on its $58 million investment.
The numbers are crazy for a company with only 56 employees and roughly $20 million in revenue, but it made sense for Facebook. WhatsApp, which doesn’t even have a sign on the door of its headquarters in Mountain View, is one of the world’s most commonly used communication utilities after e-mail and the telephone and will introduce voice calling later this year.
Its 470 million users have already erased $33 billion in SMS revenue from wireless carriers that got rich and fat charging per text. WhatsApp charges nothing for the first year and then asks you to pay $1 a year thereafter. No ads, no stickers, no premium upgrades. In later discussions Zuckerberg promised the WhatsApp founders “zero pressure” to make money, saying, “I would love for you guys to connect 4 to 5 billion people in the next five years.”
WhatsApp could eventually make Zuck a lot of money. It costs WhatsApp five cents to support each user, and it’s charging customers in only a handful of countries, like the U.S. and Britain, where mobile payments are relatively mature. WhatsApp believes $1 billion in annual revenue is within reach by 2017 as the service grows and billing falls into place. Insiders say the app could also start charging airlines or companies like Uber for the right to send messages to WhatsApp users with their permission.
The big risk, as always, is a mass exodus of users to the next new thing. That doesn’t seem likely right now. WhatsApp, Acton confirms, has been signing up a million new users per day since Dec. 1, 2013.
Pretty much everyone in Hong Kong with a smartphone uses WhatsApp. In United Arab Emirates you can watch WhatsApp Academy on TV. In the Netherlands, where 9.5 million people (more than half the population) actively use it, “Whatsappen” is now a verb in the Dutch dictionary, meaning to send a WhatsApp message. Brazil’s professional soccer players use its group-chat feature to organize labor strikes during games.
“Sometime in the not too distant future,” says Sequoia’s Goetz, “WhatsApp is likely to eclipse all SMS traffic across the globe.” (Perhaps it’s no surprise that Zuckerberg reportedly held a private meeting with 20 telecom executives last week to ease their fears of being buried by free web-based services like Facebook and WhatsApp.)
Back in 2012, before all the craziness, Koum had time to mull over his lunch with Zuckerberg. He and Acton had $8 million from Sequoia and wanted nothing more than their independence. They rarely went to Silicon Valley networking events and didn’t entertain bid offers. So Facebook’s overtures from then on never turned into bids on paper. Zuckerberg and Koum instead became friends, meeting once a month or so for dinner.
For the next year WhatsApp focused on its march past 300 million users. In June mid-2013 the founders happened to meet Sundar Pichai, who oversees Android and Chrome at Google. They talked about their love of clean and simple digital products. At some point around early 2014 Pichai decided it would be good for Koum and Acton to meet his CEO, Larry Page. They agreed to meet on Tuesday, Feb. 11.