What Facebook’s Acquisition of WhatsApp for 19 Billion US Dollars Teaches You about Building a Valuable Company?

The news broke on February 19, 2014 that Facebook is acquiring WhatsApp for a whopping 19 Billion US Dollars- yes, that’s a B for the Billion! – $12 billion in stock, $4 billion in cash, and an additional $3 billion in restricted stock units to WhatsApp’s founders and employees.
facebook whatsapp acquisition
So what makes an app with 450 million active users across the globe more valuable than companies like Expedia ($10.2B), Red Hat ($11.1B), Hertz ($11.5B), American Airlines ($12.3B), Xerox ($13.2B), Harley-Davidson ($14.1B), Symantec ($14.4B), Marriott International ($15.4B), and others?

The deal was in the making for over 2 years. Mark Zuckerberg (founder of Facebook) and Jan Koum (Co-Founder and CEO of WhatsApp) spent several dinner, treks, and phone calls to finally come to a decision about the merger. Funny thing is, Koum agreed to the acquisition on Valentine’s Day by interrupting Zuckerberg’s family dinner.

7 Things You Can Learn from WhatsApp about Building a Valuable Company

#1: Revenues are not the only thing that matters. It’s the value you bring to the table

Going with the numbers, Facebook will need 20-40 years to make back the amount they paid to WhatsApp. However, they still took the risk, went ahead and acquired the product.

The reason for the acquisition is WhatsApp compliments Facebook’s mobile strategy perfectly. With over 450 million active users, a stick rate of 70% (more than 62% of Facebook, which itself is pretty high), and a growth rate faster than that of Facebook, Instagram, Skype, or Gmail (WhatsApp is adding a million users every day), it was a no-brainer deal for Facebook.

whatsapp growthTakeaway:

Companies are valued based on not just how much revenue they are generating, but on the value the company will provide the acquirer. Your business audience does have immense value- whether they explicitly give you money or not.

#2: You fail several times; but in the end, you succeed

It’s interesting to know that WhatsApp co-founder, Brian Acton, was rejected a job offer from Facebook and Twitter. He failed in converting a job offer that would have made him millions.
brian whatsapp co-founder rejected
However, the rejection didn’t stop him. He co-founded WhatsApp and made a cool few billions. How’s that for “an offer you can’t refuse”?

Takeaway:

Point is, you’ll feel defeated many times. You might lose contracts, customers might not pay you on time, or you might end up not generating any business at all for a while. The good thing is, if you keep pushing, there’s a brighter side of the story waiting to unfold.

image on the desk

Note on Jan’s desk. © Sequoia Capital

#3: Focus on your customers; everything else is secondary

When WhatsApp was founded, the founders focused on their users rather than on generating revenues. They ensured that the app was clean and simple to use. No ads ever! Here are some of the other highlights of the app

  • Cross-platform availability: WhatsApp was available for almost every platform out there. They were not limited to smartphones; Feature phone support was one of the major driving forces that led to its adoption in countries like India
  • Ease of account set up: If you have ever used WhatsApp, you’d realize that it does not involve complicated account sign up process. It uses your phone number for verifying and authentication. Talk about making the barrier of entry so low

Takeaway:

Is your business customer-centric or your business-centric? When you make your customers the top priority, everything else falls in place automatically.

#4: Stay lean

WhatsApp has less than 50 employees (of them 32 are engineers). For a company that fetched a valuation of 19 Billion US Dollars, by normal standards, the employee count sounds absurd. But WhatsApp showed the world that it’s not the employee count that matters, its passion and focus (hiring 1 smart person instead of 10 mediocre ones goes without saying here).

Another company that comes to my mind is plenty of fish- with under 70 employees and several million dollars in revenue ($10 million as of 2008).

Takeaway:

With technology being so advanced, there is no more excuse for you to not stay lean with your business. Every kind of task, if it’s repeatable, can be automated; there’s a good chance there is a SAAS product out there than can help you with your requirements while staying lean during scaling up.

#5: Less Limelight; More Focus

In many countries, business owners seek to get the limelight (especially start-up founders). They spend more time attending conferences, networking, and giving gyaan (advice), than getting work done. However, WhatsApp is different. According to sequoia, the sole investor in WhatsApp

From the moment they opened the doors of WhatsApp, Jan and Brian wanted a different kind of company. While others sought attention, Jan and Brian shunned the spotlight, refusing even to hang a sign outside the WhatsApp offices in Mountain View. As competitors promoted games and rushed to build platforms, Jan and Brian remained devoted to a clean, lightning fast communications service that works flawlessly.”

Takeaway:

Stop chasing the limelight. Focus on your business and let others find you.

#6: Get the pricing right
whatsapp pricing model
WhatsApp pricing is interesting. It does not charge users for the first year. If you want to continue using the service after the first year, you need to pay 1$/year.

It’s interesting because it gets people to use the product for free. Once they get hooked to it and understand the true power of the product, they are made to pay for continuing the usage.

What’s even better is that the pricing per year is an absolute steal. At 1$/year, and considering all the communication is free (you need to have a data plan though), it’s much more cost effective than SMS or calls. Talk about ROI!

Takeaway:

While WhatsApp could afford to give away the product for free for the first year, your business needs to find a similar way of getting your customers to experience your product or service by lowering the barrier for entry.

It’s often a bad idea to give away things for free- especially when you have huge overhead costs (unlike in WhatsApp’s case). You need to innovate and find an angle that draws customers to your business and let them try you out for the first time (combo offers, partnership with related businesses, pay for performance, etc are good things to try out).

#7: It’s OK if you don’t have a marketing budget; heck it’s better if you have none!

WhatsApp has spent 0 dollars on advertising or user acquisition. They don’t even have a marketing person on-board. Talk about growing a company with user focus and not based on spending VC money.

Takeaway:

When you don’t have a marketing budget, you tend to innovate. You don’t fall into the trap of buying ads and seeing what’s performing the best and not getting enough time to build and ship better versions of your product.

That being said, it’s not always possible to not spend on marketing and gain businesses. Spending money on marketing should be seen akin to using nitro boost. With ad spend you should be able to jump ahead a few years.

Had WhatsApp used advertisements or marketing techniques, they might have reached here faster- probably would have taken then 2 or 3 years instead of 5.

Conclusion

All these being said, you should not get overly obsessed with how another business achieved success. Some strategies might work, while others might bomb for you.

Your business is unique and what works from WhatsApp might not work for you. The idea is to take inspiration for WhatsApp’s success and try to implement it in your business. Be lean and move fast. If something is not working, move ahead with other strategies.

Over to you

What do you think is the best take away from this acquisition? What business strategy do you think works for you vs WhatsApp?

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