Exclusive: The Rags-To-Riches Tale Of How Jan Koum Built WhatsApp Into Facebook's New $19 Billion Baby
Forbes 2/19/2014
Jan Koum picked a meaningful spot to sign the $19 billion deal to sell his company WhatsApp to Facebook earlier today. Koum, cofounder Brian Acton and venture capitalist Jim Goetz of Sequoia drove a few blocks from WhatsApp’s discreet headquarters in Mountain View to a disused white building across the railroad tracks, the former North County Social Services office where Koum, 37, once stood in line to collect food stamps. That’s where the three of them inked the agreement to sell their messaging phenom –which brought in a miniscule $20 million in revenue last year — to the world’s largest social Network.
Koum, who Forbes believes owns 45% of WhatsApp and thus is suddenly worth $6.8 billion — was born and raised in a small village outside of Kiev, Ukraine, the only child of a housewife and a construction manager who built hospitals and schools. His house had no electricity or hot water. His parents rarely talked on the phone in case it was tapped by the state. It sounds bad, but Koum still pines for the rural life he once lived, and it’s one of the main reasons he’s so vehemently against the hurly-burly of advertising.
At 16, Koum and his mother immigrated to Mountain View, a result of the troubling political and anti-Semitic environment, and got a small two-bedroom apartment though government assistance. His dad never made it over. Koum’s mother had stuffed their suitcases with pens and a stack of 20 Soviet-issued notebooks to avoid paying for school supplies in the U.S. She took up babysitting and Koum swept the floor of a grocery store to help make ends meet. When his mother was diagnosed with cancer, they lived off her disability allowance. Koum spoke English well enough but disliked the casual, flighty nature of American high-school friendships; in Ukraine you went through ten years with the same, small group of friends at school. “In Russia you really learn about a person.”
Koum was a troublemaker at school but by 18 had also taught himself computer networking by purchasing manuals from a used book store and returning them when he was done. He joined a hacker group called w00w00 on the Efnet internet relay chat network, squirreled into the servers of Silicon Graphics and chatted with Napster co-founder Sean Fanning.
He enrolled at San Jose State University and moonlighted at Ernst & Young as a security tester. In 1997, he found himself sitting across a desk from Acton, Yahoo employee 44, to inspect the company’s advertising system. “You could tell he was a bit different,” recalls Acton. “He was very no-nonsense, like ‘What are your policies here; What are you doing here?’” Other Ernst & Young people were using “touchy-feely” tactics like gifting bottles of wine. “Whatever,” says Acton. “Let’s cut to the chase.”
It turned out Koum liked Acton’s no-nonsense style too: “Neither of us has an ability to bullshit,” says Koum. Six months later Koum interviewed at Yahoo and got a job as an infrastructure engineer. He was still at San Jose State University when two weeks into his job at Yahoo, one of the company’s servers broke. Yahoo cofounder David Filo called his mobile for help. “I’m in class,” Koum answered discreetly. “What the fuck are you doing in class?” Filo said. “Get your ass into the office.” Filo had a small team of server engineers and needed all the help he could get. “I hated school anyway,” Koum says. He dropped out.
When Koum’s mother died of cancer in 2000 the young Ukrainian was suddenly alone; his father had died in 1997. He credits Acton with reaching out and offering support. “He would invite me to his house,” Koum remembers. The two went skiing and played soccer and ultimate Frisbee.
Over the next nine years the pair also watched Yahoo go through multiple ups and downs. Acton invested in the dotcom boom, and lost millions in the 2000 bust. For all of his distaste for advertising now he was also deep in it back then, getting pulled in to help launch Yahoo’s important and much-delayed advertising platform Project Panama in 2006. “Dealing with ads is depressing,” he says now. “You don’t make anyone’s life better by making advertisements work better.” He was emotionally drained. “I could see it on him in the hallways,” says Koum, who wasn’t enjoying things either. In his LinkedIn profile, Koum unenthusiastically describes his last three years at Yahoo with the words, “Did some work.”
In September 2007 Koum and Acton finally left Yahoo and took a year to decompress, traveling around South America and playing ultimate frisbee. Both applied, and failed, to work at Facebook. “We’re part of the Facebook reject club,” Acton says. Koum was eating into his $400,000 in savings from Yahoo, and drifting. Then in January 2009, he bought an iPhone and realized that the seven-month old App Store was about to spawn a whole new industry of apps. He visited the home of Alex Fishman, a Russian friend who would invite the local Russian community to his place in West San Jose for weekly pizza and movie nights. Up to 40 people sometimes showed up. The two of them stood for hours talking about Koum’s idea for an app over tea at Fishman’s kitchen counter.
“Jan was showing me his address book,” recalls Fishman. “His thinking was it would be really cool to have statuses next to individual names of the people.” The statuses would show if you were on a call, your battery was low, or you were at the gym. Koum could do the backend, but he needed an iPhone developer, so Fishman introduced Koum to Igor Solomennikov, a developer in Russia that he’d found on RentACoder.com.
Koum almost immediately chose the name WhatsApp because it sounded like “what’s up,” and a week later on his birthday, Feb. 24, 2009, he incorporated WhatsApp Inc. in California. “He’s very thorough,” says Fishman. The app hadn’t even been written yet. Koum spent days creating the backend code to synch his app with any phone number in the world, poring over a Wikipedia entry that listed international dialing prefixes — he would spend many infuriating months updating it for the hundreds of regional nuances.
Early WhatsApp kept crashing or getting stuck, and when Fishman installed it on his phone, only a handful of the hundreds numbers on his address book – mostly local Russian friends – had also downloaded it. Over ribs at Tony Roma’s in San Jose, Fishman went over the problems and Koum took notes in one of the Soviet-era notebooks he’d brought over years before and saved for important projects.
The following month after a game of ultimate frisbee with Acton, Koum grudgingly admitted he should probably fold up and start looking for a job. Acton balked. “You’d be an idiot to quit now,” he said. “Give it a few more months.”
Help came from Apple when it launched push notifications in June 2009, letting developers ping users when they weren’t using an app. Jan updated WhatsApp so that each time you changed your status — “Can’t talk, I’m at the gym” — it would ping everyone in your network. Fishman’s Russian friends started using it to ping each other with jokey custom statuses like, “I woke up late,” or “I’m on my way.”
“At some point it sort of became instant messaging,” says Fishman. “We started using it as ‘Hey how are you?’ And then someone would reply.” Jan watched the changing statuses on a Mac Mini at his town house in Santa Clara, and realized he’d inadvertently created a messaging service. “Being able to reach somebody half way across the world instantly, on a device that is always with you, was powerful,” says Koum.
The only other free texting service around at the time was BlackBerry’s BBM, but that only worked among BlackBerries. There was Google’s G-Talk and Skype, but WhatsApp was unique in that the login was your own phone number. Koum released WhatsApp 2.0 with a messaging component and watched his active users suddenly swell to 250,000. He went to see Acton, who was still unemployed and dabbling in another startup idea that wasn’t going anywhere.
The two sat at Acton’s kitchen table and started sending messages to each other on WhatsApp, already with the famous double check mark that showed another phone had received a message. Acton realized he was looking at a potentially richer SMS experience – and more effective than the so-called MMS messages for sending photos and other media that often didn’t work. “You had the whole open-ended bounty of the Internet to work with,” he says.
He and Koum worked out of the Red Rock Cafe, a watering hole for startup founders on the corner of California and Bryant in Mountain View; the entire second floor is still full of people with laptops perched on wobbly tables, silently writing code. The two were often up there, Acton scribbling notes and Koum typing. In October Acton got five ex-Yahoo friends to invest $250,000 in seed funding, and as a result was granted cofounder status and a stake. He officially joined on Nov. 1. (The two founders still have a combined stake in excess of 60% — a large number for a tech startup — and Koum is thought to have the larger share because he implemented the original idea nine months before Acton came on board. Early employees are said to have comparatively large equity shares of close to 1%. Koum won’t comment on the matter.)
The pair were getting flooded with emails from iPhone users, excited by the prospect of international free texting and desperate to “WhatsApp” their friends on Nokias and BlackBerries. With Android just a blip on the radar, Koum hired an old friend who lived in LA, Chris Peiffer to make the BlackBerry version of WhatsApp. “I was skeptical,” Peiffer remembers. “People have SMS, right?” Koum explained that people’s texts were actually metered in different countries. “It stinks,” he told him. “It’s a dead technology like a fax machine left over from the seventies, sitting there as a cash cow for carriers.” Peiffer looked at the eye-popping user growth and joined.
Through their Yahoo network they found a startup subleasing some cubicles on a converted warehouse on Evelyn Ave. The whole other half of the building was occupied by Evernote, who would eventually kick them out to take up the whole building. They wore blankets for warmth and worked off cheap Ikea tables. Even then there was no WhatsApp sign for the office. “Their directions were ‘Find the Evernote building. Go round the back. Find an unmarked door. Knock,’” says Michael Donohue, one of WhatsApp’s first BlackBerry engineers recalling his first interview.
With Koum and Acton working for free for the first few years, their biggest early cost was sending verification texts to users. Koum and Acton were using cutthroat SMS brokers like Click-A-Tell, who’d send an SMS to the U.S. for 2 cents, but to the Middle East for 65 cents. Today SMS verification runs the company about $500,000 a month. The costs weren’t so steep back then, but high enough to drain Koum’s bank account. Fortunately WhatsApp was gradually bringing in revenue, roughly $5,000 a month by early 2010 and enough to cover the costs then. The founders occasionally switched the app from “free” to “paid” so they wouldn’t grow too fast. In Dec. 2009 they updated WhatsApp for the iPhone to send photos, and were shocked to see user growth increasing even when it had the $1 price tag. “You know, I think we can actually stay paid,” Acton told Koum.
By early 2011 WhatsApp was squarely in the top 20 of all apps in the U.S. App Store. During a dim sum lunch with staff, someone asked Koum why he wasn’t crowing to the press about it. “Marketing and press kicks up dust,” Koum replied. “It gets in your eye, and then you’re not focusing on the product.”
Venture capitalists didn’t need the press to tell them WhatsApp was going viral. Koum and Acton were batting away all requests to talk. Acton saw VC funding as a bailout. But Sequoia partner Jim Goetz was persistent, spending eight months working his contacts to get either founder to engage. He’d met with a dozen other companies in the messaging space like Pinger, Tango and Baluga, but it was clear WhatsApp was the leader, and to Goetz’s surprise the startup was already paying corporate income taxes: “The only time I’ve seen that in my venture career.” He eventually sat down with Koum and Aton at the Red Rock Cafe, answered a “barrage” of their questions and promised not to push advertising models on them but act as a strategic advisor. They eventually agreed to take $8 million from Sequoia on top of their $250,000 seed funding.
Two years later in Feb. 2013, when WhatsApp’s user base had swelled to about 200 million active users and its staff to 50, Acton and Koum agreed it was time to raise some more money. “For insurance,” says Acton, who recalled that his mother, who ran her own freight forwarding businesses, used to lose sleep over making payroll. “You never want to be a position where you can’t make payroll.” They decided to hold a second funding round, in secret. Sequoia would invest another $50 million, valuing WhatsApp at $1.5 billion. At the time Acton took a screenshot of WhatsApp’s bank balance and sent it to Goetz. It read $8.257 million, still in excess of all the money they’d received years before.
Now with an even bigger number in his bank account, Acton went to a local landlord, interested in leasing a new three-story building around the corner. The landlord didn’t know who WhatsApp was, but the money talked. The new building is now under construction, and WhatsApp will move in this summer as its staff doubles to 100.
In early February 2014, Koum zooms past the new building in his Porsche on the way to a boxing class that he often misses, and is now late for. Will he finally put up a “WhatsApp” sign? “I can’t see a reason for there being a sign. It’s an ego boost,” he scoffs. “We all know where we work.” Later he pulls up to nondescript block building in San Jose, grabs a gym bag and walks into a dimly lit gym for a private lesson with a diminutive, gum-chewing coach standing next to a boom box blasting rap music. “He likes Kanye,” the coach says smiling. He holds two mitts up high as Koum throws slow but powerful punches. Every few minutes Koum sits down for a break, slipping the gloves off and checking for messages from Acton about WhatsApp’s servers. Koum’s boxing style is very focused, the coach says. He doesn’t want to get into kickboxing like most other students, but just get the punching right. You could say the same for a certain messaging service that wants to be as straightforward as possible.
It’s true, Koum says, ruddy faced as he puts on his socks and shoes. “I want to do one thing, and do it well.”
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